I came across this tweet below on Wednesday night and pivoted my topic for the week to dive into it a bit more. It’s something that I’ve both seen at my own work and with colleagues. Like you reading this, it feels like there’s a new recruiter in my inbox every day or two. So I’d say that yes, the “Great Resignation” feels real, although the name seems a bit off to me.
The market is getting wrecked and sentiment is low. I’ve seen Tweets that compared current bearishness to that at the top of the tech bubble around the century mark. It was certainly a bubble then and feels like one now as well. Tech company multiples have collapsed. A 50% haircut from all time highs is considered decent at this point. Yet people are still taking on risk seeking out that sweet, sweet yield. Not quite ZIRP, but feels pretty similar. As Harry points out in his tweet, the reward just isn’t there for folks who are joining companies already at high valuations as they shift towards IPO.
Let’s break down the first part of the tweet. Most people join startups for one or a combination of a handful of reasons. The main reasons include: wanting to build something, resonating with a mission, and building up value from equity/stock options (equity is usually only for early joiners or executives, though). The last reason is where the money is made. Startups often pay less than big public companies or late stage private companies because they don’t have the funding or revenue, yet. With the frothiness of the last couple years, arguably decade, many private companies were pegged at insane valuations and have been able to raise immense war chests.
Take Amplitude, for example. In June of 2021, they raised $150 million at a post-money valuation of $4 billion. Lets say you joined as a mid-level employee on May 4th, 2021 (a year before Harry’s tweet) and your stock options were priced at $20. Seems like a pretty good price, right? Amplitude went on to IPO later in 2021 (9/28/21) and opened at $35 a share - a moderate 75% gain. As you can see in the picture below, the stock peaked at almost $85 a share - about a 325% gain! Then the market did what it does, and Amplitude’s share price crumbled to $16.92 - below the fictional initial option price!
Amplitude is one of many companies going through a similar struggle. A ballooned valuation led to a rich outcome only to pop and drop before employees could vest more than 25%. The reward has diminished for employees seeking companies that can take them to the dos commas promised land.
But the other side is now fraught with risk. Joining a young startup now, where there is very tangible upside, has seemingly gotten riskier. Pennies are being pinched and belts tightened. Raises seem like they won’t be quite as excessive as they have been, which means that only the startups that are the cream of the crop will succeed. Runways will be shorter, burn rates will be scrutinized like never before, and actual problems will need to be solved.
All of that is to say, the upside is higher, but the risk is too. Compared to the high raisers, which may pay more salary and a good options package. The high-priced companies’ added bonus of options and security may be just as appealing. This will be a pivotal point for both startups and high-valuation companies.
Some companies with previously high-flying valuations are wising up to this sentiment and making moves to both retain and attract talent. For example, Instacart, which cut its valuation from $39B to $24B, just under 40%. Instacart priced themselves down before the market could. Not sure how that will impact sentiment towards the company, but it could pay dividends in terms of attracting talent who see Instacart as a high priced company that has a reasonable path to continued growth but realistic valuation. Options likely were cut back down to lower prices, hopefully for existing employees as well. And one thing to keep in mind is that options barely cost anything for startups to give. They have a lot and they’re accounted for very early on as companies consider their growth. Like Harry said, it’s time to be generous on equity (and options).
One thing to keep in mind though, as Bill Gurley points out below, is that the foreseeable future will probably be nothing like the last decade and change. Most of us who have joined startups seeking outrageous returns likely won’t see them… ever. A key part of his thread is his point about “forget[ting] those prices happened.” I highly recommend reading the thread and his shared article.