What is an internal valuation, and does Stripe actually lose anything from lowering it? My cynical experience suggests that companies usually have more to gain by lowering their valuation than they do by inflating it.
Apologies if the article already described the possible negative impacts to Stripe caused by a decreased internal valuation. I’m unable to read it since it requires a subscription I cannot afford (due to inflation of course, nothing personal to the WSJ).
Ok, no one has given a good answer to this yet. The “internal valuation” is a 409a valuation and the primary use case is for the tax basis for options granted within 12 months of the grant date. Stripe gives double trigger RSUs so this won’t directly impact the large majority of employees getting RSUs, but they may choose to offer more equity for refreshers or new hire grants, this has little/nothing to do directly with 409a. 409a also is not used by investors to value shares, it has nothing to do with “mark to market” pricing of funds who own stripe equity communicating the value of their investment to LPs in the fund. There are 3 ways to calculate a 409a valuation, specified directly by the IRS, they’re all a very naive way to value companies, and once again the whole point is to have a tax basis for options grants. 409a vals are nearly always below the latest private financing valuation and it is generally in the employees interest to keep the 409a as low as possible for as long as possible to keep the tax basis as low for exercising options. The strike price in options directly comes from the 409a valuation, the basic idea is that (strike price) * (total number of outstanding shares) = 409a valuation. If you do this, the options the company gives you have no value according to the IRS so they are not counted as income. Thanks for coming to my TED talk.
Generally, "Internal valuation" is the valuation used by investors while the company is still private.
One way it can affect Stripe is that it makes stock options less valuable to current employees, and can influence the weight those options have in persuading new hires.
It only makes the options less valuable if they are actually offering a liquidity event, otherwise it is actually advantageous to employees as any new option grants (both new hire and refreshers) are delineated in dollars, so a lower valuation means they get more of them.
I get that this might not align with the perspective of their employees, especially if they skew young and their expectations were shaped by tech stock price dynamics of the 2010s. A lot of folks haven't yet come to terms with the new normal. From an ISO/RSU earning employee's perspective, it's better for prices to correct quickly and completely so you can start getting new grants at more reasonable valuation with real upside.
It really depends. A lower valuation also means raising money will be at lower valuations, which means investors get more of the company, which means more share dilution.
There are typically two valuations of private companies. The "internal valuation" is usually the valuation of the common shares (ie, those that are granted to employees) whereas the "external valuation" is the value of the "preferred" shares that investors purchase. The external/preferred valuation is usually higher because the preferred shares have more attractive terms (such as that you get your money back first before other equity holders are paid out).
From the article: "A 409A valuation is an independent estimate of a startup’s fair market value often used to price stock options to employees."
I don't think it's as nefarious as that. What people are calling the "public" position here is the value of preferred stock sold in a financing, and the "internal" valuation is the value of common stock. They're different things - the preferred stock has downside protection and other special rights that make it more valuable than the common stock so it should have a different price. These internal valuation reports pretty explicitly calculate the value of the common stock as a discount applied to the preferred stock price, due to the rights and liquidation preferrence and the fact that the common is not freely tradable.
I don't think so. If more equity is raised at a lower valuation then isn't it the definition of a "down round", where existing investors take a haircut? Of course, employees bear the brunt of the down rounds because their meagre holdings can turn out to be worthless after a down round.
Apologies if the article already described the possible negative impacts to Stripe caused by a decreased internal valuation. I’m unable to read it since it requires a subscription I cannot afford (due to inflation of course, nothing personal to the WSJ).