September 28, 2023
Instacart's recent IPO was met with significant fanfare as a signal of a potential public offering thaw. However, not everyone may have come out ahead— Instacart's prohibition on private secondary transfers of common shares before going public deprived shareholders of the opportunity to try and sell at a materially higher valuation than where the stock is trading today.
Among these shareholders are Instacart employees. Those employees who exercised their options despite Instacart’s prohibitions would have had to make a significant cash outlay from their own pocket, in addition to a potentially significant tax obligation. They also could not leave the company without exercising their options since those options would then expire and become worthless. These employees were left in the unfair position of buying an asset with no guarantee they could ever sell.
Instacart's IPO now allows these employees to sell, but they find themselves getting the short end of the stick again. The IPO and subsequent trading pricing is at a fraction of what these employees could have sold in the secondary market, had they been allowed. Further, even now, liquidity is not immediately available as they will need to wait out the 180-day post-IPO lockup period before being allowed to sell at the prevailing market price. By that time, pricing could be even lower. This is especially likely since Instacart’s IPO float was only 6.7% of its total capitalization, meaning there could be a very large overhang of sellers when the lock-up expires, which in turn will drive pricing further down.
At the peak of the market in 2021, some preferred Instacart shares were trading at over $100 per share. Typically, in a bull market, the disparity in value between common and preferred shares is minimal, suggesting that Instacart's common shares would likely have traded at a comparable valuation. Indeed, until the bearish second half of 2022, pricing in the secondary market for common stock across the private market typically moved in lock-step with preferred stock pricing.
Instacart's decision to prohibit secondary transfers of common stock (with the sole exception being a 2020 company-led tender offer at an arbitrarily set price that did not reflect the market) left employees with no choice. Their shares remained locked away as the company's valuation reached $39 billion. When employees can finally sell, the company will likely be trading near the $9 billion IPO valuation and possibly even lower.
As discussed in a previous article, many tech employees frequently accept lower salaries in exchange for stock options, banking on the promise of future financial rewards. However, when companies restrict secondary transfers, they effectively deprive their employees of the economic value that they supposedly conferred on them by granting them options.
After all, what is the economic value of owning options if you are unable to sell them?
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