Pizza Parties and Pizza Math

Devon Morris
Sep 29 · 14 min read

EquityBee is solving the capital problem of Employee Stock Options

Today, Group 11 announced leading a $55MM Series B round in EquityBee, with participation from new investors Greenfield Partners, as well as existing investors Battery Ventures, LocalGlobe, Latitude, AltaIR, and ICON. This is the third time over the past two years that Group 11 has led a financing round in EquityBee, having also led the $20MM Series A in February of this year as well as the Series Seed in 2020. This brings EquityBee’s total funding to $83MM.

Co-founders Oded Golan (CPO), Oren Barzilai (CEO), and Mody Radashkovich (COO)

The question is: Why is Group 11 leading another financing only seven months after their Series A?

The answer: EquityBee has gone from a small startup in Tel Aviv to an emerging leader in digitizing US privately held stock option transactions in a matter of 18 months. The launch of their ESOP platform in the US market with a physical US office was February of 2020 (yes we recognize the irony). During a global pandemic, EquityBee has grown their deal volume >700% ($ value of stock options matched on their platform), and quadrupled the number of funded employees on the platform. I encourage our readers to visit our Medium post from February 2021 to see where EquityBee was at the time.

In addition to the above, the answer is fundamentally about a massive problem solved by a new digital solution. It involves taking a deeper dive into Cap Tables, Access to Capital, Basic Math and… Pizza Parties. Yes, you read that right. I know my analogy seems strange but stay with me.

Pizza Time!

When a privately-held company successfully exits, through an IPO, merger, or acquisition, everyone is excited. It is a Pizza Party! Pizza time! All the years of hard work, pivots, contentious board meetings, and missed and surpassed sales quotas are capped by a time to celebrate ‘making it’. The company has worked hard enough that new, outside investors, or for the first time public investors, see enough value in the company that they want to buy shares, typically at a premium. Drinks are poured for the celebration and everybody is ready to start cutting up the pizza and getting to their slice.

In this analogy, the pizza is the capitalization table (also known as the ‘Cap Table’), which is a gigantic ledger of all the owners of shares in the company (usually a Delaware C Corporation in the US startup world). A slice of the pizza is a specific participant’s ownership of shares in the company, recorded with a stock serial number with the company’s lawyers. The Pizza Party is the exit when owners of shares get to exchange their pizza slices for cash.

When a startup is older, or takes longer to have this Pizza Party (the time between the startup’s formation and an exit), the actual pizza can often get much larger (more shares issued through stock splits, new equity issuance, and further employees getting Stock Options) and accumulate more slices. The pizza pie can get bigger over time and add more participants in the form of new employees and outside investors. But regardless of status, everyone who owns a share of the company gets a seat at the table and a right for a certain-sized slice(s) of the pizza.

Pizza Math

Whether it’s pizza, a table-shared appetizer, or a six pack, as the Pizza Party goes into the night, participants will start doing Pizza Math. What is Pizza Math? I think the best example is witnessing the standoff and internal voices between Kevin James and father-in-law Jerry Stiller from the sitcom, The King of Queens. The pizza was initially cut up, people started taking their slices, and fewer and fewer slices remained. Active participants are very attentive to their allotted slice.

If the pizza pie, in its entirety, is liquidated (through an IPO, merger or acquisition, or even bankruptcy), like the Pizza Party mentioned above, then each participant gets their percentage of the liquidation considerations (called the pro-rata). A co-founder might have 10% of the pie; an early outside investor might have 8%, and an early employee might have a stock option contract as part of their benefits that gives them the opportunity to buy 1% of the pie at a specific price. Each participant on the Cap Table’s ledger is legally entitled to whatever percentage they own.

The discussion of Employee Stock Option Plans, or ‘ESOP’, and connection to EquityBee’s ESOP platform and digital solution, begins here. Employee stock option contracts are not unlimited; they have terms and conditions. One industry-wide condition is that if an employee leaves a company (whether voluntarily or terminated), they have a set window (usually 90 days) in order to exercise their allocated contract, and thus buy their shares/pizza slices at a predetermined price (called the Post-Termination Exercise Period or ‘PTEP’).

If an employee does NOT exercise their stock option contract (give legal notice and pay the strike price, within the designated PTEP), they do NOT get to share in a liquidation scenario. They effectively give up what was access to a financial right, what they had rightfully earned with hard work, and what might have become significant wealth creation. The slice was theirs (through the ESOP contract) at some point, they could’ve been a participant, but they effectively gave it up.

Using the pizza analogy, if an employee doesn’t exercise a stock option, the pizza slice goes back to the company in the form of unallocated ESOP. It is then made available for someone else to buy or exercise, or it sits on the company’s legal books as having an issuance value (usually par value, which is $0.0001) but no owner. Regardless, ‘if you don’t use it, you lose it!’ (a la Leah Remini clutch move against Kevin and Jerry!)

The cost of lost Pizza

So why would someone work for a company, and then choose to miss out on their own shares and Pizza Time? Who would give up such an opportunity?

From EquityBee’s research and experience, the primary reasons employees don’t exercise are: they simply forgot they had the options, or they didn’t know about the common 90-day window to exercise. But the most common reason? They don’t have the capital in cash to exercise and can’t afford the risk. In order to exercise, the holder of the employee stock option contract must produce the cash required to buy the shares (and then pay the associated taxes to the tax authorities at the end of the year). What might initially be a financial education problem, is primarily an Access to Capital problem.

From data gathered on EquityBee’s platform, the average exercising cost of stock in the US is $10k annually pre-tax (taxes are often 85% of the cost of exercising) or $140k with tax for an employee’s entire benefit package. ESOP contracts usually vest over a few years during an employee’s potential tenure and thus change depending on the term of employment and benefits package. But an additional $10k/year (not including tax!) is a hefty bill for anyone, therefore it’s not surprising many employees have to forgo exercising a future slice of their pizza. They don’t realistically have a choice to own something that is legally theirs to have.

Let’s build a basic scenario that describes the upfront capital problem in exercising stock options:

An employee has a stock option contract, as part of their compensation, allowing them to buy 40,000 shares at a $1.00 strike price per share (the guaranteed price), vesting over 4 years (each year the remaining employed at the company, they get 10,000 more shares). To exercise, they need $10,000 in cash each year (pre-tax), or a total of $40,000 over 4 years. After 4 years of working for and helping build the startup, the employee is leaving for another opportunity, and has 90 days to exercise the contract.

Consider then, if the exercise price was $1.00 per share when the contract was signed, and 7 years since the employee started, 3 years since they left, the company has matured and there is an IPO that would value the startup’s shares at an exit price of $10.00 a share. See the basic calculations below:

  • Cost: 40,000 stock options x $1.00 pps = $40,000 strike cost (pre-tax!)
  • Exit: 40,000 stock options x $10.00 pps = $400,000 exit value
  • Potential gross upside: $360,000

The problem is clear in this scenario: $40,000 upfront in cash is a lot for most people (and they will have to pay the taxes on top of that), including employees at a successful and growing startup, to pay upfront. What makes it hurt more is the capital must be paid in one go and before the 90 day window expires, and taxes must be paid on it too!

All of that considered, an employee could make $360,000 in a 7 year window on a $40,000 investment, if they are somehow able to front the necessary capital in the 90 days. Look at what they can miss out on in real $! That’s a lot of lost pizza!

With the above costs, it’s no surprise then that more than half of employees in the US don’t exercise their options. This type of financial event can surpass other high cost life purchases like a house down payment, college, retirement, and cars. As stated above, if an employee doesn’t exercise in the allotted time, the stock goes back to the ownership of the company. Assessment? It’s pay to play.

The reader can now see the problem from the employee’s point of view. It is a matter of access to capital, financial education, taxes, and contracts. In the end, it is a missed opportunity in wealth creation, caused by a lack of financial access (and thus financial inclusion), and therefore appears to be serious unfairness in the situation.

How big is the Pizza Pie?

Now that we’ve described the nature of the problem with Access to Capital, how big is the pizza pie that is the private ESOP market in the US? How many shares (and real $) are being left on the table when employees don’t exercise? How big is the market and the problem that EquityBee solves?

This is a question Group 11 and EquityBee’s C-suite have asked a number of times and from a few different angles. Unfortunately, information on private Employee Stock Option Plans is not universally or publicly available. The information is scattered, decentralized, and opaque. Unsurprisingly, there are few startups trying to disrupt this space.

Bits of data like stock pricing, value, number of participants, and strike price are gleaned from private data and Cap Table management providers like Carta, ZoomInfo, or Pitchbook. More concrete data points can also be discovered from IRS documents like the individual’s Form 1099, corporation’s Form 3921 (Exercise of an Incentive Stock Option Under Section 422(b)) and Form 3922 (Transfer of Stock Acq. Through an Employee Stock Purchase Plan), as well as the US Dept of Labor’s Form 5500 Annual Report (from the Employee Benefits Security Admin).

The most reliable, independent data we were able to find on ESOPs in the United States was from the National Center for Employee Ownership (NCEO), which analyzes the above-mentioned Form 5500. We estimate that based on startup data from providers like Crunchbase, CB Insights, Linkedin, CompTIA, and Pitchbook, the NCEO’s observations are likely under-reporting by a large margin.

From Group 11 and EquityBee’s general research and analysis of the above data, we have come up with the following US market sizes and reference points:

  • $186BN Total Asset Value of Private-Sector ESOPs within the US (5,864 plans in 2018, likely approaching 6,600 plans in 2021)
  • 6–7MM — Projected # of tech employees in privately-held US companies in 2021
  • $10,000 — The average annual exercise cost for employees (pre-tax; EquityBee’s data)

With the general estimates above, we can see that access to capital to exercise ESOPs is a multi-billion dollar problem. If we take the 6–7MM estimated tech employees at privately-owned companies, and the $10,000/year average exercise cost, it is at least a $60BN annual need for capital (pre-tax!) to exercise. If the asset value of private-sector ESOPs is >=$186BN, and ESOPs are usually 5–10% of a Cap Table, we’re discussing $9–18BN in potentially lost value. With an estimated 50–70% of employees not exercising their options, somewhere in the delta of the annual cost and total value is a staggering amount of lost wealth creation.

According to a report by Secfi, existing or former employees left $4.9BN on the table by not exercising their pre-IPO stock options for late-stage tech unicorns in 2020. Airbnb and DoorDash were two real-world examples of the problem. They were some of the biggest IPOs in 2020 with the highest amount of unexercised stock options. Existing and former Airbnb employees left over $966MM (est. based on 47MM Options) on the table in unexercised options through the IPO, while DoorDash employees left over $954MM (est. based on 34.5MM Options). This is a lot of lost pizza and a lot of people are being unnecessarily left out.

Access to capital to exercise is a real problem, a big problem, and we don’t think it should be this way.

More Pizza Parties, More Pizza Time

How can we make more equitable Pizza Parties? How can the Pizza Party, the startup exit where all owners in the Cap Table get a slice, really involve EVERY participant that built the company? How can the experience of stock ownership, the Access to Capital, and thus wealth creation, be more equitable if the problem really is this big?

Until recently, if someone wanted to transfer shares or stock options between two parties, it was done through an expensive, manual process of lawyers and legal agreements. Physical contracts and physical shares were signed and passed by hand between parties. These costs and slow processes (remember an employee often has 90 days to exercise), it’s no surprise over half of employees don’t exercise.

Enter EquityBee.

EquityBee solves this entire situation through a digitized platform, where employees offer their Employee Stock Options and EquityBee matches them with accredited investors, family offices, and dedicated funds who want access to those specific shares. These investors are the other side of the coin of employees who need capital: these ~13MM US Accredited Investors want access to these startup shares and are often buying at much more attractive prices and cost basis, then they would through other channels!

Through EquityBee’s platform, the investor fronts the necessary capital and the employee is able to exercise their contract within the 90 day period (a transaction can close in days on the platform based on fund transfers). The supply (employee’s shares) is meeting the demand (investors who see value in those shares) brought together in a (digital) location; this is the essence of building new markets.

EquityBee co-founders Oren Barzilai (CEO), Oded Golan (CPO), and Mody Radashkovich (COO) have finally built an online-first platform to bring the whole ESOP exercising process into the 21st century. They are one of the only secondary market platforms that is approaching this problem from the perspective of the employees, and bridging the capital deficiency with other investors. By combining multiple regulatory, operational, and logistical steps and utilizing ML and RPA into a single streamlined digital product, EquityBee makes the process convenient and efficient. Both the employees who put up the shares, and the investors who front the capital, get to conduct a financial agreement and transaction through a slick interface where all steps, from issuance to exit, are done digitally.

What was previously an opaque and manual process, can now be completed digitally in a few days. EquityBee facilitates the access to capital for employees, and gives them back the power, figuratively getting them the slice of pizza they earned.

With this type of solution, EquityBee can solve a potentially multi-billion dollar market problem that has been expansive and opaque with manual processes for decades. This type of product market fit, with a digitally scalable solution, is what will facilitate future exponential growth and warrants additional funding only seven months after a previous round. It is because of this digitized solution, that they have grown so fast over the past two years, and Group 11 believes they can grow so much more into the future.

If the market need is indeed in the hundreds of millions annually, and the number one reason employees do not exercise is upfront capital and tax considerations, then the only solution is to help find the capital for those employees as conveniently and efficiently as possible. Get them to the Pizza Party. This is why Group 11 continues to invest in EquityBee: they are the only company truly solving this massive problem.

I think it’s incredibly sad to go to a Pizza Party and leave before you get a slice. Especially if you were somehow directly involved in making that pizza so big and delicious. EquityBee thinks so too. Through the match-making on their platform, EquityBee is democratizing the access to wealth creation in Employee Stock Options. This solution is not just one that is digital and thus more efficient, but one that is more equitable.

It is their founding and continuing mission: “empower all startup employees to participate in the success of the companies they helped build’’. Solving the PTEP problem is just the first step in achieving this mission, and EquityBee’s new infusion of capital will enable them to accelerate on achieving their mission. Group 11 is proud to back a team that knows the problem of employee stock options and is building a digital and scalable solution to address it.

Congratulations to co-founders Oren Barzilai (CEO), Oded Golan (CPO), Mody Radashkovich (COO), EquityBee’s investors, and the entire EquityBee team!

O, and if the reader hasn’t figured it out yet: I love pizza.


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