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With IPO market shut, the stock riches of tech employees find new buyers


With venture capital fundraising starting to slow, and the pain of the public tech stocks and recent IPOs creeping into private market equity valuations, start-ups are facing new challenges related to the employee stock that has been so lucrative in the war for talent.

Fintech start-up Brex, the No. 2 company on the 2022 CNBC Disruptor list, is in a unique position as it relates to this quickly changing landscape. Its business credit card, financing, and spending management products are used by start-ups like Boxed and Outdoor Voices, as well as once disruptive start-ups that are now public companies like Airbnb and DoorDash, giving it real-time access into the financial accounts of start-ups.

Brex co-founder and co-CEO Henrique Dubugras, speaking on CNBC’s “Squawk Box” on Tuesday, said that while the company itself “does not have any IPO plans,” it is looking to give employees “some liquidity to weather this storm.”

As a result, Brex had a $250 million tender offer as part of its employee liquidity program in which existing investors like Y Combinator bought shares from employees.

“It’s something we hope to keep doing in the future and I think is a good bridge between now and going public,” Dubugras said.

Brex has had its own fundraising success amid the recent hot venture capital environment. It raised a $425 million Series D round at a valuation of $7.4 billion in April 2021 that was led by Tiger Global. That was followed by a $300 million Series D-2 round in January that valued the company at $12.3 billion. In total, the company has raised more than $1.2 billion from investors, which include Y Combinator and PayPal co-founders Max Levchin and Peter Thiel.

How to handle employee liquidity — and the tension between retaining existing employees and recruiting new ones at lower valuations — has been an issue within some of the biggest recent decisions made by the most highly funded start-ups.

In March, Instacart slashed its valuation by nearly 40% to $24 billion as a reflection of the decline in technology stocks, and in particular, slowing growth in the online grocery sector. The company had previously been valued at $39 billion in March 2021 when it raised $265 million, making it then one of the most valuable venture-backed companies in the U.S.

The new reality of valuations is closely linked to the economics of compensation in Silicon Valley. In cutting its valuation preemptively, Instacart sent the message to employees and potential recruits that upcoming stock awards would be issued at a new fair value, making potential equity packages more attractive and aligned with current market conditions.

“That’s where the majority of compensation comes from in big tech,” said Brian Lee, senior analyst of enterprise technology at venture investment and start-up research firm CB Insights. “Lowering valuations allows you to lower the exercise price of options … and allows for the opportunity for growth if valuation goes up again,” he said.

The fact that Instacart’s move remains the exception to the rule, though, shows it is a tough decision for start-ups. For employees who hold options that are underwater, they can be granted additional options as well as the potential for growth.

In May, Instacart confidentially filed for an IPO with the U.S. Securities and Exchange Commission.

“It’s a good business move to start looking, testing the waters, see what interest there is for the business,” according to Kyle Stanford, senior VC analyst at PitchBook. “And if it doesn’t complete the IPO for a year or more, employees can now see that it is going through the process, and has good options packages for new employees.”

SpaceX is offering to sell shares in an employee tender, according to a report from the New York Post on Tuesday. While it’s unclear if founder Elon Musk may take part in the sale to help fund his acquisition of Twitter, the deal would see SpaceX shares offered at $70 each, valuing the company at around $125 million. The company last raised $337 million in December at a $100 billion valuation.

Brex and the success of start-ups

Brex’s core business has benefited from the venture capital boom, with its unsecured, high-limit business charge card used by many privately funded start-ups. Brex says it has more than 10,000 corporate customers.

“We were disrupting the traditional industry for credit cards by giving limits to start-up companies and technology companies that couldn’t get access to it,” Dubugras told CNBC as it was named to the Disruptor list for the second year in a row on Tuesday. “As we evolved, these companies grew to be a lot larger than when they started and they started having new needs – so that’s when we went into spend management software and mobile, helping these companies not only scale their spend management but also hire anywhere.”

Brex, which Dubugras said competes with companies like American Express on the corporate card side and Concur in spend management, looks to erase some of the friction that “adds more bureaucracy and makes the company slower” when it comes to those processes.

“Our software tries to increase the speed of the businesses while creating a culture of financial discipline at a global scale,” Dubugras said. “That’s the next step for us.”

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