Stripe has been in the news this past week for lowering its own valuation to around $74 billion from $95 billion, a 28% decline that made waves in startup-land.
Given the company’s size and its status as one of the most richly valued startups in history, the payments giant carries significant weight in the private markets. It’s worth taking the time to make sense of this internal valuation cut, especially to understand if the move is as bearish as the big numbers might lead some to believe.
The Wall Street Journal reported that Stripe’s new valuation was not set by a new funding round, but instead a new 409A valuation. Recall that 409A valuations are set by third-parties, which means that they are not tied to what a venture backer or other investor thinks. It’s an IRS-regulated process that measures the value of common stock against public market comps to help set a fair market value.
For more on 409A valuations, TechCrunch recently wrote an explainer that is worth your time.
It’s not hard to see why Stripe’s internal valuation is falling. The value of public companies has declined in recent quarters, and technology companies, in particular, have taken a slew of punches after spending several years in the sun, warmed by enthusiastic investors in both the public and private markets.
Within the gamut of tech companies, fintech has seen the steepest valuation retreats. Global fintech funding in the second quarter of 2022 fell 33% to $20.4 billion across 1,225 deals in Q2 from Q1 2022, per CB Insights, and declined nearly 46% from the $37.6 billion raised across 1,287 deals in Q2 2021.
While it’s not American, and therefore not affected by U.S. accounting valuation standards, Klarna was repriced in a more public, and perhaps more painful, way in recent weeks. Its fall from a valuation of around $46 billion to less than $7 billion was indicative of just how much the market has changed when it comes to valuing fintechs.
Examples abound of the beatings fintech is enduring. Block, formerly known as Square, is down nearly 80% from its 52-week highs, while PayPal has seen its value retreat around the same amount within the same timeframe. Shopify’s stock price has declined around 82% compared to its 52-week high. The list goes on.
In that context, Stripe’s new 409A valuation is hardly surprising. And, it is a far smaller reduction in value than many other fintech companies have seen in recent months.
However, some might argue that the 28% cut wasn’t just unsurprising, it was welcome. Wait, what? The answer to that starts with employees.
Startup employees are a key angle to consider when talking about valuation changes. 409A valuations help set the value of employee stock options and the potential tax penalties thereof, and employees usually have to pay tax on the difference between their options price and the per-share value of the equity in question as set by a 409A valuation.
For Stripe employees, its lower valuation may not seem bullish when it comes to the potential future exit value of their options. However, per AngelList head of founder products, Sumukh Sridhara, that decline in value also makes it cheaper for employees to exercise their vested options.
“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.”
AngelList launched AngelList Stack last year, which offers a suite of founder-focused products, including a 409A valuation tool.. Sridhara says that since most startups on AngelList skew early-stage, “their argument is that their stock is worthless” so they can grant options and equity more efficiently.
The lower valuation lets employees at Stripe now have a perhaps fairer and more realistic expectation of the value of their shares, and therefore a more limpid understanding of the value of their present compensation. And, for people who want to join Stripe, they can get equity at a lower cost, perhaps extending the potential upside.
Sridhara argues that a company like Stripe is incentivized to get as low of a 409A valuation as possible, because then it can sell prospective hires on the potentially higher profit they stand to make from their equity compensation.
Some think that Stripe was proactive in getting its 409A updated, and we’d agree. When a growth-stage company with what seems to be a good bit of secondary activity gets to a certain scale, a monthly refresh of its fair market value just seems like good housekeeping.
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