April 2024 Report: Winners and Losers of the Reddit IPO

We’ve talked prior months about how the IPO market affects the Venture Capital and Startup landscape as a whole. Most people, ESO included, agree a more robust IPO pipeline would increase the number VC funding rounds and further open up private market liquidity through secondary sales, M&A, and of course, more IPOs.

Given Reddit’s recent IPO, we thought it would be interesting to look back at the numbers, and more specifically, how did Reddit’s employees and VC investors do?

Below is a graph of Reddit’s private stock price over time, for both Preferred and Common stock (all price data from Reddit’s Form S-1). One caveat: any pre-IPO Reddit shareholder (employee or investor) is subject to their IPO Lockup Period, which prohibits selling until at least August 2024. All the numbers here are strictly “on-paper” using the closing price of $45.97 on April 1st, 2024.

Reddit was technically founded in 2005, but our graph doesn’t start until their first priced round in 2012 (Series A). We can assume that anyone with stock prior to 2012 was part of the early team and did great in the IPO.

As of market close on Monday 4/1, all Series A through E investors are “in-the-money”, even though Series E investors were technically below their $42.47 issue price at the original IPO price. Only Series F investors and employees hired in 2022 are “underwater” at this price. So how well did they all do? Let's start with the VCs.

Series A (17.22x), Series A-1 (7.75x), and Series B (7.34x) investors all knocked it out of the park. The investment took over a decade to reach liquidity, but these massive return multiples are huge hits for those funds. Not too much to cover here: early stage investing is a very high risk, high reward business.

Series C (2.92x) and Series D (2.12x) is where it gets interesting. Despite generating more than a 2x return on their capital, these investments took more than 5 years to materialize. In that same time period, the S&P 500 generated a 2.12x and 1.97x return respectively. Overall, the Series C investors will take their 37% better return than the S&P. The Series D investors, however, only beat the S&P by 8%.

Finally, the Series E (1.08x) investors are barely sitting above their cost basis, while Series F (0.74x) investors are down 25% (both losing to the S&P over their respective time periods).

Now to the employees! Below is a table of employees who started at each funding round. This includes their strike price, the cost to exercise 1,000 shares, and what those shares are worth today. All exercise costs assume $0 in taxes, which is unfortunately rarely the case, but this allows us to compare these apples to apples - as if they are being exercised and sold today.

As you can see, employee returns followed a similar pattern to those of the VCs. If you were in early, you did great. If you got in at the highs, you did not.

Why this matters: Without going line by line, three things stand out.

1. Employee pricing rules! Employees get in at cheaper prices than VCs, so they stand to gain even more in an IPO. VCs pay a premium for certain rights associated with preferred stock, but if your company is on the IPO track, it’s great to own common. This is most notable for the Series F employees who are only $5 below their strike price, compared to the VCs who are $15 in the hole.
2. Recent Reddit hires did okay. We’ve established the most recent investors are down around 25%, but per the S-1, anyone hired after June 2022 is in the money! Since the FMV of Reddit’s common stock dropped alongside the rest of the market in 2022, they were able to grant cheaper options during that time period that are up 67%. Hopefully, anyone with a $49.59 strike price was able to reprice their options to a lower value when the FMV dropped. This is a common courtesy extended by companies to employees, not a guarantee.
3. Yesterday’s price is not today’s price. We hit on this slogan numerous times in 2023, but this graph does a great job of showing it. The market got a bit too hot in 2021 when Reddit raised at a $10B valuation. Within a year of their funding round, their FMV dropped more than 30% (as much as 45%). They priced the IPO at 45% below the Series F preferred price and even at Monday’s close, it sits almost 37% lower than common’s all time high. This paints a perfect picture of why companies are struggling to raise money in today’s market. If a titan like Reddit is worth almost 40% less than its most recent private valuation, you can imagine many others are in the same boat (or worse). Reddit is fortunate enough to have a strong enough brand and business to be publicly traded. Other smaller companies. not yet ready for an IPO, must raise additional funding prior to any exit. The issue is they don’t want to raise at lower valuations so must grow efficiently until the market is ready to pay them the price they are looking for.

Overall, Reddit is a great case study for startups as a whole. It shows the full story of a meteoric rise that ran into a market reset. Preferred pricing got ahead of itself, but the FMV ended up being a close representative of the company’s value. With many companies currently trading close to their FMVs in the secondary market, this IPO does add to the fact that shareholders need to be comfortable with lower prices if they want to get liquid any time soon.

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