Instacart employee special
Illustration: Christopher T. Fong/Protocol

Instacart thinks discounts are good. Even on the company’s own valuation.

Protocol Pipeline

Hello and welcome to Pipeline! This week: Instacart’s effort to turn bad into good, Justin Kan’s new venture, and how to raise a first fund.

Downside upside

It’s not often that you see companies brag about being worth less. And it’s not exactly what you’d think of as a morale booster. But that’s more or less what Instacart intended when it told employees it had lowered its valuation. The grocery delivery company said it was dropping the company’s 409A valuation — an internal measure — from $39 billion to $24 billion, and adjusting its grants of restricted stock units accordingly.

This seemingly small accounting change is actually pretty significant in the startup world, and points to how private equity compensation at highly valued startups is looking more and more like what employees get at public companies.

Don’t call it a down round. Employees may worry if a 409A price drops, but it doesn’t necessarily affect their equity the way raising new money at a lower valuation would.

  • The 409A price is an internal accounting measure used to price employee equity which is typically updated at least annually. It’s different from the price that investors pay for preferred shares, which is typically cited as the “valuation” in news reports.
  • One issue that wasn’t clear in some of the coverage of this: For tax reasons, 409A prices are updated at least once a year, and more often if there’s a material change. And like a public stock price, 409A prices can swing up and down. After a long bull market, many startup employees were stunned to see that stocks can crash. “409A valuations change all the time,” said Vieje Piauwasdy, senior director of equity strategy at Secfi, which offers financing to startup employees for exercising options and other needs. “So when COVID hit in 2020, we saw [all] those 409As go down.”
  • A similar thing has happened since November’s tech downdraft. So Instacart’s 409A was going down regardless of what the company wanted to do. Instacart’s business is a mix of delivery, ads and software; some reasonable public comparisons include DoorDash, Meta and Shopify, whose shares are all way down.

Instacart’s trying to get ahead of a falling market. Since it can’t do anything about its 409A price, and its IPO seems to be delayed, it’s doing the next best thing.

  • Tying its RSU price to the 409A price going forward was a proactive move, since Instacart was preparing to release annual refresher RSUs to existing employees.
  • These RSUs are given annually to existing employees and will now be granted at the new $24 billion price. (The new price will also be used for RSUs for new employees.) Employees will essentially now be getting shares that are closer to their estimated value in the public markets.
  • The company is telling employees that this is a benefit for them since they’re effectively getting more shares at the lower price, according to a person familiar with the company’s internal messaging.
  • Unlike high-priced options that can become worthless if the share price drops, older RSUs granted at the $39 billion valuation still have some value. But the new RSUs offer more upside.

New employees like a lower price. It’s a big recruiting tool in a wildy competitive job market.

  • It also helps explain why Instacart went public with the price change. One reason companies started giving out RSUs in the first place was the perception that their shares were too high to see big gains on options, whose strike prices are set by the 409A valuation.
  • Instacart has been issuing RSUs for some time now, but the lower valuation could help early employees who hold stock options — especially since it now looks like they might have to wait longer for an IPO. “It just got a whole lot cheaper for employees to actually exercise their options and go long shares,” Piauwasdy said. Exercising options costs money up front but means that gains may be taxed at the lower long-term rate.
Ups and downs are part of a startup’s financial life. When a company has to raise a down round, that can be a negative signal and common shareholders can end up diluted. Companies are often wary of the effect that can have on recruiting. But that didn’t happen with Instacart: The company says its business is still just as strong despite the stock market. With thousands of employees, it was inevitable that the lower 409A valuation was going to leak, so Instacart did the smart thing in trying to turn a negative number into a positive.


Seed valuations haven’t changed much despite the recent macro uncertainty, according to Semil Shah: “Perhaps obvious in retrospect: With Q1 ending, from my vantage point @ pre/seed, I saw *zero* change to investment climate & market from January 1 to today. In fact, the quality of tech founders starting new things feels like it's improving upon itself.”

On the other hand, Series A through E valuations have all been hit, says Sheel Mohnot. “We're seeing impact all over the portfolio, Series A-E. Our seed cos raising Series A in Q1 came in <1/2 the price of our Q4 ones (which were absurd). I've seen late stage companies doing flat rounds despite 2-3xing revenue.”


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Inside track

How to start your own VC fund as an outsider, according to Henri Pierre-Jacques, including long deal memos, heavy due diligence, large partnerships and a massive intern program.

Raising a first fund is an “incredibly hard & opaque process,” according to 22 fund managers, as told to Spacecadet’s Wiz.

Fred Wilson has advice on winning VC deals, including some counterintuitive suggestions.

Web3 vs. Web 2.0 dilution. Many public companies issue shares and thereby inflate their share count, but Web3 companies do as well, Tomasz Tunguz notes in an interesting comparison. Tokens, he notes, can also pay for services, so they have more potential uses than equity.

Moves: Kyle Lui jumped from DCM to Bling Capital, becoming the second GP along with Ben Ling.

Need to know

When a new job goes wrong. Stacy Chang left her gig as chief of staff at Founders Fund to become a GP at Arrowside Capital, but that offer disappeared. Now there’s a $10 million lawsuit.

Mary Meeker’s Bond Capital raised $2.5 billion. So much for the late-stage slowdown?

Y Combinator held its winter Demo Day, with 414 companies from 42 countries and about 50% outside the U.S. While B2B had the largest proportion of companies, fintech had 24%, a good portion of which were Web3- or crypto-based.

On Protocol: Justin Kan, the former Y Combinator partner and co-founder of Twitch, is back with an NFT gaming marketplace, Fractal.

Your weekend reading: After 25 years, Brewster Kahle and the Internet Archive are still working to democratize knowledge.


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