Case Study: Reddit's IPO Lockup Is Over

One of the most high profile IPOs of 2024 has been Reddit. Since this is such a recognizable name, ESO decided to look at how employees and investors did on this IPO. Any pre-IPO Reddit Shareholder (employee or investor) is subject to their IPO Lockup Period, which prohibited selling until August 9, 2024. Therefore, we will be using the closing price on August 8^th($54.94) to determine Reddit Shareholder’s returns.

Below is a graph that shows Reddit’s stock price over time. 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 to2012 was part of the early team and did great in the IPO. Now let’s take a look and see how the investors did.

Preferred Stock: How did the Investors do?

Series A (20.58x), Series A-1 (9.26x),and Series B (8.78x) 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 (3.48x) and Series D (2.53x)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 2.15x and 2.00x return respectively. Overall, the Series C investors will take their 62% better return than the S&P. The Series D investors also did ok and beat the S&P by 27%.

Finally, the Series E (1.29x)investors are a bit above their cost basis, just losing out to the S&P which had a 1.37x in the same time. Unfortunately, the Series F (0.89x)investors are down 11% losing handily to an S&P return of 1.19x.

Common Stock: How did the Employees do?

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.

Compounding this early effect is the discount vs preferred that employees get at each round.  As you can see from the chart below, the later an employee started at the company, the less of a discount they received. As expected, earlier employees have more risk, but also get a sweeter deal with options. The exception to this is Pre-IPO employees, who got a lower price than series F ones due to the common stock dropping.

Why this matters?

Without going line by line, four 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 especially great for the Series F employees who are $5 above their strike price, compared to the VCs who are $7 in the hole.
2. Recent Reddit hires did great. We’ve established the most recent investors are down around 11%, but per the S-1, anyone hired after June 2022 got a nice return! 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 100%. 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 the August 8^th close, it sits almost 11% lower than preferred’ 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     still worth less than its most recent private valuation two years ago, 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.
4. Lockup’s wild ride. Roughly a month ago Reddit’s stock hit $73, and on August 7^th it hit as low as $49.33. Now a little over a day later it’s back up to $54.94. The lockup period for Reddit was a true rollercoaster and we don’t pretend to know what drove every change here. But it appears like it rode along with most of the market’s growth for the beginning of the summer, then like many other tech stocks sunk down in early August, but popped back up a day before it’s lockup ended. In this case most investors will take the $54.94 it ended at, still a large premium from their original IPO price of $34.  

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