Private startups are buying back increasing amounts of stock from employees, reports the Wall Street Journal. The move comes at a time when IPOs of startups have slowed, or have been underwhelming when they did go public.
According to data from Nasdaq Private Market, which is owned by Nasdaq and provides software to private companies that manages employee share sales, 2015 saw an increase of 40% over 2014 of the amount of shares bought back from employees at private companies. In total, $940 million of employee shares were bought back by startups in 2015.
The Journal notes that some private startups are buying back company stock they’ve awarded to their employees so those employees can cash out at current valuations of the company, instead of risk seeing their share value sink during an underwhelming IPO. While that may seem a bit pessimistic, it’s a fact that in recent years many tech IPOs have underperformed.
The most high-profile example is Twitter, which had an IPO price of $26 when it went public on November 7, 2013. Yesterday, Twitter’s shares closed at $16.08, well below its initial public offering. Other examples include Square, which IPO’d for $9 in November. Yesterday their shares were trading at $8.47. Etsy IPO’d last April at $31 a share. As of yesterday, it was trading at $7.55.
2016 isn’t starting out to be any better either, Bill Siegel, head of Nasdaq Private Market told the Journal, noting that the IPO market in 2016 is off to its slowest start in seven years. In order to combat that, Siegel says more private startups are buying back more shares quicker than ever before.
"We’re seeing earlier-stage companies on a steep trajectory doing these [share buyback] transactions earlier in the life cycle," Siegel told the WSJ. "They see it as a strategic retention tool for employees who are working hard and want to see some return on their equity."