Mar 25, 2020 - Economy & Business

Coronavirus layoffs could cost startup employees their equity

Illustration: Sarah Grillo/Axios

Silicon Valley may end up with large numbers of abandoned employee equity, as startups cut jobs amid the coronavirus-caused economic uncertainty.

Why it matters: Startup employees typically have just 90 days from the end of employment to either exercise their stock options, for which they must pay cash, or to let them go.

Driving the news: A number of companies, such as SoftBank-backed Compass, travel lodging company Sonder, and business travel company TripActions, announced layoffs in recent days.

"Paying up front out of pocket, it’s a significant amount that people just don’t have in cash," says EquityBee CEO Oren Barzilai, whose company helps finance employee stock option purchases.

  • EquityBee and Secfi, which also offers financing for employee stock options, both report a recent uptick in startup employees signing up for their services.

Between the lines: What makes these decisions tricky for newly laid-off employees is the combination of the common 90-day exercise window and the volatile economic outlook.

  • Some companies have extended these windows (e.g., Compass employees will have 12 months), but 90 days remains the industry standard.
  • According to Carta, only about 11% of startup employees have exercise windows longer than 90 days, up from about 3% in 2010. And while employees exercise more options when they can do it early, only about 15% of options can be excercised early.

The bottom line: Some workers not only are losing their jobs, but they're likely to lose part of what they earned over the past several years.

Go deeper

Bernie's plan to hike taxes on some startup employees

Illustration: Sarah Grillo/Axios

Sens. Bernie Sanders (D-VT) and Chris Van Hollen (D-MD) introduced legislation that would tax nonqualified stock options at vesting, rather than at exercise, for employees making at least $130,000 per year.

The big picture: Select employees at private companies would be taxed on monies that they hadn't yet banked.

The forgotten firms in the Senate relief bill

Illustration: Sarah Grillo/Axios

The Senate late last night passed a $2.2 trillion safety net for the American people and American businesses. But not all businesses were included. The package left out thousands of small companies owned by private equity firms.

Details: The legislation includes $350 billion in small-business loans for companies with fewer than 500 employees. That's a liberalization of typical SBA rules, which are more industry-specific in terms of employee number and revenue.

The coronavirus dip is worse than anything startups predicted

Illustration: Rebecca Zisser/Axios

For the last couple of years, startups have been preparing for a recession, but the coronavirus pandemic and its effect on the economy are unlike anything they predicted.

Why it matters: Even companies that had recession plans and have been modeling burn rates, cash flow, and dips in business are throwing those projections out the window and taking drastic measures.