The Rise and Fall of Startup IPOs

In recent years, there has been a surge in the number private companies going public. The year 2021 saw the most IPOs in history.

1,035  startups going public and raising close to $150B in proceeds. The boom in the private market created a frenzy with startups and investors eager to grab these funds. In the same vein startup employees were determined accumulate
Stock Options and become shareholders of these successful companies, which were promised that they would be on the verge of an IPO.

The mantra of the startup industry was growth at any cost. Companies overspent for growth. Startups had to convince shareholders to sacrifice their current returns for the aggressive expansion they promised.
Future profits would be huge. It was normal in 2021 for companies that were not profitable to list on the stock market based on future earnings.

Sadly, though perhaps inevitable, growth did not follow the negative unit economics. The IPO boom came crashing down in 2022. Companies that have been successful in IPOs are those who were able to maintain their growth.
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The proceeds of the previous year’s IPOs were only 5%. Now, due to the market instability and economic downturn, IPOs seem to have dried up. The IPOs of startups that were on the brink of becoming public have now essentially dried up.

Investors suffered huge losses as companies were forced to either cancel or accept much lower valuations.

Looking back, there’s no doubt that 2021’s IPO boom simply is not sustainable in the current market.

It is tragic that this decline has not only affected investors, but also the employees of the startup.

The promise of a lucrative IPO not too far away motivated employees to join these startups. Some employees even accepted a lower wage in exchange for a larger percentage of equity with the hope that an IPO would be lucrative. Unfortunately,
This decline led to the devaluation and loss of value for their employee stock option, leaving them with less money than they expected. Not only was this a huge loss for the employees, but it also affected their net worth.
They would have also missed out on cash if they chose a higher salary to compensate for equity.

This had a devastating effect on employees who already exercised stock options. Many employees were forced to pay high costs for stock options because of the positive sentiment in the market. It didn’t matter how high
the price was, because they were under the impression that their equity’s value would greatly increase upon an IPO. The value of these shares eventually decreased – often well below their strike price – leaving many with large losses. Many people suffered huge losses when the value of these shares ultimately decreased – sometimes even well below the strike price.
Those who had borrowed to exercise their option now face difficulties in repaying the debt, and there is no way out to cover the costs.

The lesson I take from this is that in order to reduce risk, it’s important to make educated choices. It is important that startup employees have accurate information regarding their equity’s value and its current market worth. A clear understanding is the only way to get the best results.
You can make better decisions by knowing the current value of equity. This vital information was seriously lacking during the IPO bubble and ultimately contributed to its failure.
In the event of major losses. 

This can be done with the help of an equity value estimator.  These types of calculators can  provide employees with an estimate of the
Current: Market value of their equity to help them make better informed decisions about their financial prospects.

Companies can also improve transparency through training and resources that help employees better understand how equity fits into their compensation package. Employees should be aware of this.
They should be able easily to access this information, and not have to rely on their companies for determining what their equity in the current market is worth.

The ramifications from this IPO’s rise and fall highlight the importance of education and transparency when it comes equity. In a startup world that continues to grow, it is important that employees and companies work together to make sure equity is protected.
The compensation system is fair, transparent and reflects the real value employees provide.