Axios Pro Rata

It's been a rough go for the startup industry over the past 18 months — but now can also be a great time for workers to grab a seat on a rocket ship.

Driving the news: Prospect, a startup that's raised $1 million in funding from Construct Capital and angel investors, is building a data-based tool it says can help workers figure out where they're most likely to maximize their equity returns in venture-backed startups.

The big picture: Big public technology companies' stocks — long seen as a safe way to accumulate a very comfortable nest egg as an employee — took a huge hit in the turmoil of last year's rout in tech stocks.

• Meanwhile, certain private companies like Instacart have cut their internal valuations to attract employees (who would otherwise balk at astronomical option prices with nowhere to grow).

What they're saying: Choosing a startup job is "fundamentally an investment decision, but most employees don't have the tools for that," Prospect co-founder and CEO Billy Gallagher tells Axios.

• The company is partly inspired by Gallagher's own job search in 2018. After stints in tech journalism, venture capital, and writing a book, he decided to try his hand at a startup.
• Through online research and conversations with friends and investors in Silicon Valley, he made a list of about 20 companies and ultimately joined Rippling, then about a year old.

How it works: Prospect is building out a model whose main purpose is to show job seekers the potential upside of employee equity at various startups, for a typical four-year-vesting period. It also has a rudimentary calculator that can parse job offers a candidate uploads.

• It's using data from sources like Pitchbook, a company headcount provider, news articles, and even directly from some companies.
• Prospect's model uses factors like a company's investors, funding, pace of headcount growth, revenue, user and customer growth, among others to predict the value trajectory of employee equity.
• It plans to eventually charge employers for helping them recruit, and possibly job seekers as well.

Between the lines: Similarly to VCs, Prospect believes that making significant money via startup equity isn't as much of a crapshoot as some say.

• Past the seed stage, a company's success becomes more predictable, argues Gallagher.
• That's also why the idea of betting on the most promising startups as an employee isn't novel. For example, a Stanford University student in 2014 put out a list of "breakout" startups, which has been updated annually.
• And there's then-Google CEO Eric Schmidt's famous words to Sheryl Sandberg when she was considering leaving politics to join the company in 2001: "If you're offered a seat on a rocket ship, get on, don't ask what seat."

Yes, but: Whether an employee's stock options will turn into life-changing money someday still depends on variables like the size of the equity grants they get, whether they fully vest (and exercise) their stock, and so on.

• Even VCs don't always pick right.
• And Gallagher's list in 2018 had some misses — like Quibi, the mobile-only video subscription streaming service that raised $1.75 billion in funding and shut down just six months after its debut.

The bottom line: This could be a good time to "buy the dip" as a startup employee.

• "The people this resonates with are those who have worked at a successful startup before," says Gallagher.

With more conservative (or as some would say, "sane") startup valuations, it can be a good time to get in at a lower "entry price" as an employee — but it's not exactly a free-for-all all either.

Zooming in: Not only has hiring been down this year compared to 2022, but employee equity packages are down as well, according to equity management software company Carta.

• In fact, the equity portion of startup compensation packages declined more than cash salaries did from the first quarter to Q2 of this year (9% versus 1%), head of insights Peter Walker tells Axios.

By the numbers:

• New hires (who are granted equity) across Carta companies in January 2022: 68,562
• New hires (who are granted equity) across Carta companies in January 2023: 38,250
• In Q2 of 2023, only 26% of startup workers exercised their stock options, the lowest quarter in the past five years — and tied for Q2 in 2020.
• There's also been a significant spike in options repricing in the last three quarters, though that remains a rare benefit for startup employees. Only about 200 companies did that last quarter, according to Walker.

Between the lines: Tighter compensation packages compared to the recent boom times suggest that "given the slow pace of hiring, during the negotiation, the candidate doesn't have as much leverage," he says.

• In contrast, when there's an abundance of startup funding, it's reflected in employee compensation and headcount growth.

The bottom line: The savviest of startup workers will be able to take the most advantage of this market.

• Trends in 409a valuations (Carta)
• Laid-off tech employees say goodbye to stock options' golden age (Axios)
• Down-rounds are ahead for tech startups (Axios)

Speaking of Instacart… in lieu of trivia this week, send me your thoughts on the company's IPO filing – are you surprised by the business? Why or why not?