Not long after the first months of the COVID-19 pandemic prompted layoffs at many startup companies, their concerns for the global crisis gave way to a record-setting period. Ultimately, 2021 was a record year for global venture capital investments and led to soaring startup valuations all over the world.
Today, however, the state of the market is drastically different from 2021’s sky-high investments and valuations.
This post discusses how we got here and what it means for startup employees in 2022.
How Did We Reach This Level of Market Volatility?
Startup growth surged throughout 2021, buoyed by an ongoing willingness to rebuild remote teams, rely on cloud technology to keep operations running smoothly, and take on new entrepreneurial ventures. From France to Japan to the United States, 2021 also saw the registration of thousands upon thousands of new businesses – many of which required the hiring of brand new team members.
Late-stage startups and larger companies also experienced significant success in pandemic life. Millions of people turned to companies like Netflix, Klarna, Peloton, Instacart, and Zoom throughout 2020 and 2021 in order to remain healthy, connected, and entertained.
This familiar cycle – to 1. Attract more customers and additional funding, 2. Hire more employees to expand and improve products, 3. Attract even more customers and funding, and so forth – led to exponential growth throughout the startup sector for much of 2021.
Now, in 2022, both the private and public markets are increasingly volatile and much of the 2020 and 2021 startup growth is in question. There are many factors contributing to this. First, millions of people have returned to habits resembling pre-pandemic practices e.g. in-person office work and increased travel, leaving at-home specific products behind. Additionally, newer developments such as rising inflation and interest rates, breaks in the global supply chain, geopolitical unrest, and concerns of impending global recessions are prompting investors to slam on the funding brakes.
What Does This Mean for Employee Stock Options?
As prospective investors in the companies they’re helping build, startup employees need to consider the specific ways this market volatility impacts the decision of whether and when to exercise their stock options; this includes the recent shift of the U.S. into a bear market, “which happens when stocks close down 20% or more from their most recent high.”
Rocky Kalmanovitz, Director of Equity Success at Equitybee, knows that this turmoil can be particularly nerve wracking for startup employees.
“As companies hunker down and prepare for the worst, layoffs and restructuring often follow,” he said. “Many of those impacted employees will be on a very tight time clock to make a decision about exercising their options; they usually have only ninety days to exercise or lose out on the potential entirely.”
Even considering this short timeline, Kalmanovitz also noted a type of decision analysis-paralysis that can haunt many startup employees in tumultuous times like these.
“When you’re hearing bad news everyday, there’s a human tendency to stop watching or reading the news and to ignore it. That’s the exact opposite of what you should do if you remove the emotional element,” he said. “When you hear about everything happening in the market, start asking more questions. Seek to understand all of your options that you may have at your disposal, and form your individual strategy. For example, a lot of people don’t know that exercise deadline extensions are even a thing. A lot of people don’t realize that companies like Equitybee even exist – so they assume, ‘If I don’t have the cash right now, then I can’t do anything.’ That’s not necessarily the case. During turbulent times, professional investors look for buy opportunities, which means that the individual people looking for help have opportunities out there.”
What Do All of These Layoffs Signal to Startup Employees?
The layoffs that Kalmanovitz spoke of are already happening. In Q1 and Q2 of 2022, we’ve already seen slowed hiring plans, hiring freezes, and layoffs from many notable companies including Coinbase, Wayfair, Cameo, Klarna, Robinhood, Uber, and Meta.
According to Natasha Mascarenhas at TechCrunch, these workforce reductions – particularly at tech companies – are less related to the fact that the COVID-19 pandemic caught companies off guard in 2020 and more tied into the reality that companies have been overspending and/or overhiring and now have to reduce their spending ASAP.
As Mascarenhas noted on a recent episode of the Equity podcast, “You couldn’t have prepared for a pandemic, but you could have prepared for a pullback in the heart of a pandemic.”
Although many believe that layoffs, in particular, should be a last resort for companies who need to extend their runway, that may not be possible for the second half of this year. If Q2 2022 earnings reports come back weaker than Q1, then it’s likely that the companies that managed to avoid layoffs and hiring freezes in Q2 will have to adjust their spending reduction strategies for Q3, potentially resulting in more layoffs.
The Future of Startups
Regardless of the U.S. bear market, ongoing socio-political tension on an international scale, tentative venture capitalists, and numerous other factors influencing the current market, Kalmanovitz still believes in a more equitable and sustainable future for startup employees.
“These really tough moments in the economy might help drive new, healthier behaviors among startup employees’ handling of their stock options. With more layoffs, you inherently have more people changing jobs, which forces the short-term decision point of whether or not to exercise options. It will take offerings like Equitybee’s to bring these improvements to the forefront,” he said. “When people are between jobs, they are more likely to be tight on cash at the exact moment they need to make an exercise decision. Equitybee’s offering allows startup employees to get the money fronted to exercise their options and to pay applicable taxes. They also get to reduce their overall risk because they won’t owe any of the money back to investors unless/until there’s a successful liquidity event.”
To learn more about working with Equitybee’s Investor Network to exercise your options, head to our website.
