What does it mean to be a unicorn today and the impact on employees
The tech space is rife with “unicorns,” but what does it really mean to be placed in this rarified air? The term has become so ubiquitous that nearly every startup with a large valuation has been added to this category — but there is a distinction. In 2013, venture capitalist Aileen Lee defined unicorns as American software companies valued over $1 billion.
Although they’re still heavily concentrated in California and $1 billion is still the starting point of valuation, unicorns have expanded both globally and financially. In fact, Chinese unicorns have been rising in value. For example, Bytedance, an international internet company, is currently valued at $75 billion.
Despite the high valuations of these unicorns, a public offering can sometimes put their value at risk. Even the most prominent start-ups have been devalued by billions of dollars through the volatility of the stock market after their IPO. For example, Uber’s shares fell 7.6 percent when they went public. The ride-sharing company’s public debut was recorded as one of the worst performances of an IPO on the first day of trading.
As a result, it’s optimal for unicorns to stay private longer to establish a more solid valuation. However, staying private could present a challenge for start-up executives — some employees may need liquidity sooner rather than later, which can lead them to look for higher-paying jobs outside of the organization.
Most unicorn employees take lower salaries in exchange for shares in the company. And when an IPO is delayed, the employees’ demand for liquidity is not met — forcing talented workers to leave for a job that will pay them the desired compensation. To keep talent, employers can offer a company-sponsored employee-liquidity program, which allows employees to liquidate their shares on secondary markets.
Options Have Options
Company-sponsored liquidity programs allow companies to keep control of their cap tables and give employees liquidity through a spectrum of options.
One option would be a company-sponsored guided tender, another would be an insured forward contract in order to not impact the company’s 409A. Additionally, implementing liquidity programs can be a boon for unicorns. A liquidity event provides a peek into how the company’s shares are performing in the secondary market, which can inform valuation data.
These types of company-sponsored programs give employees a chance to access liquidity without leaving their company and give unicorns the opportunity to scale their business and grow their valuation on their own terms without Wall Street pressure.