We love a counternarrative angle these days, and this week’s choice is a look into why lower valuations may actually be a good thing for startups these days.
In the past few months, both Stripe and Instacart have seen their internal valuations updated in a 409A appraisal process. The startups saw their valuations being slashed by 28% and 38%, respectively, as a result of the appraisals. Anita Ramaswamy and I looked into 409As and learned about an entirely different meaning of a “valuation haircut.”
Here’s an excerpt from our piece:
Many founders and industry experts see a company receiving a 409A valuation that’s lower than its investor-assigned valuation as a boon. That’s because a low 409A valuation allows companies to grant their employees stock options at a lower price. Companies can also use the new, lower 409A valuation as a recruiting tool, luring prospective employees with cheap options and the promise of cashing out at a higher price when the company eventually exits.
Sumukh Sridhara, head of founder products at AngelList, says companies view 409As as an “internal equity granting authorization mechanism, and not them thinking we’re worth less.”
“If those companies would have their way, they would argue that they are worth 5% of what their public market comps are. But they won’t really get away with that,” he said.
For our full take, read the entire story, “WTF is a 409A” live on TechCrunch right now or read the companion TechCrunch+ piece, “Stripe’s new and lower internal valuation, explained.”
Plus, if you want to get more into the weeds of this conversation, join Anita Ramaswamy and me on a Twitter Space next Tuesday at noon PDT, 3 p.m. EDT. We’ll have some guests from the piece on the mic, and of course riff on whatever got cut out of the story.
In the rest of this newsletter, we’ll get into a fintech favorite, robots and software eating up headquarters. As always, you can support me by forwarding this newsletter to a friend or following me on Twitter or subscribing to my blog.