Volatile economic conditions are having a big impact on startups. Inflation and market declines have spurred many companies to cut costs in a variety of ways. In addition to hiring freezes, layoffs, and consolidations, some companies are delaying their IPO dates in the hope of launching their ships in fairer seas. In fact, Barrons recently reported that more than 300 companies were waiting for market conditions to improve before moving forward with an IPO. As a result, the market is seeing just about a quarter of the IPOs that it did during the same period in 2021.
Put it in perspective.
Investors must always remember that the market is cyclical. What goes up tends to come down, and it’s not unusual for stock prices to fall 20% to 30% from a peak. After these drops, however, prices have traditionally rebounded, and the market has recovered beyond its previous decline. Amid these ups and downs, many companies have experienced low valuations during bear markets and then gone on to richly reward their early investors. For example,
Domo (DOMO) was valued at just $170 billion during the 2018 bear market. By 2021, its market cap reached $3 billion, and it remains over $1 billion in July 2022.
DrafKings (DKNG) went public via SPAC acquisition in April 2020, just as the pandemic was heating up. After being valued at just $2.12 billion in March 2020, the company was valued at 6.5 billion at its IPO. DraftKings’ valuation reached more than $28 billion in March 2021 and remains above $5 billion despite recent declines.
After being labeled “the most ridiculous IPO of 2020,” DoorDash’s valuation slipped to $16.69 billion from $39 billion at its IPO less than a month prior. Investors were the ones laughing, though, when the company’s market cap climbed to nearly $83 billion in August 2021. While concerns that the company’s success was largely fueled by the pandemic were somewhat justified by subsequent declines, its value is above $25 billion as of July 2022.
After a record-breaking valuation at IPO, Facebook’s share price fell more than 30% in its first year of public trading—a move dubbed “The Faceplant” by market analysts. Since that time, however, the corporation has risen to become one of the world’s most valuable tech companies. Since its $104 billion IPO valuation plummeted to less than $45 billion in October 2012, it has exceeded $1 trillion and has been hovering around $450 billion in June and July of 2022.
Consider buying more shares.
Given the examples above, you can see that market declines sometimes provide golden buying opportunities. If your company is among those whose IPO has stalled in response to the current market, it’s time to strategize. Depending on how the market moves and what happens within your company, its IPO could be delayed for a year or more. In the meantime, your company may have a lower valuation. Even though this won’t affect the price you pay for shares under your compensation plan, because the taxability of your equity compensation is tied to your shares’ fair market value, it can present an opportunity to purchase shares at a lower tax cost.
Work with a trusted fiduciary advisor.
Because determining whether, when, and how much to invest in any company can be a complex process, it’s important to make investment decisions in consultation with an experienced, trusted fiduciary investment advisor. They can help you clearly assess risk and potential gain and guide you toward investment decisions that support your most important financial goals. If you decide the time is right to buy but you’re short on cash, they can also help you locate alternative sources of funding.
Get expert tax advice.
In addition to investment expertise, employees in pre-IPO companies need access to tax professionals who are experienced with the IPO process. Different types of equity compensation are subject to different tax rules, restrictions, and timelines. To get the most out of your investment, you need tax-efficient investment strategies that help you avoid giving away more of your earnings than you have to.
WRP specializes in individualized guidance for executives and employees in pre- and post-IPO companies. We provide fiduciary investment advice, tax planning, and comprehensive wealth management to help our clients build the future they envision. For more tips on managing your equity compensation, subscribe to our blog or browse our library of free resources.