- The frenzied VC market may end up hurting some startup employees, Tiger Global’s John Curtius said.
- Some may wind up overpaying for stock options if valuations go down, he said at a VC conference.
- Valuations are already coming down for later-stage companies, according to data from PitchBook.
In the red-hot venture-capital market, startups have been valued more highly than ever before. That’s led some investors to wonder whether valuations have gone overboard.
And the ones at greatest risk may be employees who join a startup that later has a drop in valuation, according to one of Tiger Global Management’s top dealmakers.
“There is a bit of frothiness in the market, and not all companies are being appropriately valued today,” John Curtius, who leads the firm’s software investments, said this week at Afore Capital’s Pre-Seed Summit.
“Making sure you do your due diligence as a startup employee is really important,” he said.
Startup employees often receive stock options as part of their compensation. They must pay a set exercise price to buy the stock. A stock price is determined by the overall value of the company and, optimally, the employees can buy their shares at a lower price than the full value. Employees also may have to pay taxes on the difference between the exercise price and the value of the shares, even though their gains are only on paper.
If the value of the company goes down afterward, they can wind up not just overpaying for the stock but also being out the tax money.
Accordingly, Curtius advised tech workers to examine which startups’ stock had the greatest potential for upside as they considered where to work and to take stock as part of their pay.
Some data suggests valuations for certain startups are already beginning to ease. According to PitchBook, the median valuation for later-stage US startups dropped to $115 million in the third quarter of 2021 from $160 million in the second quarter, while the average fell to $735.7 million from $882.4 million.
“I would be surprised if valuations went up much more than they are today,” Curtius said.
Overall, he added, he doesn’t believe the state of valuations will be ruinous for most startups.
Even if a startup has to raise a later round at a lower valuation, he said, “that’s not great, but it doesn’t have a super-long-lasting negative impact to the company.”
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