Only if the company is looking to really raise a lot of money in the IPO.
The bump and later positive price movements benefits employees and founders a lot, therefore helps in retention and lower compensation costs for new employees etc and also investors who sell .
Employees’ ISOs are computed based on the most recent 409A valuation / share price.
If an employee joins with ISOs based on a $40 share price, and the market price is $35 or $15 a quarter or two later, it is bad for morale. A bump, even a small one, means everyone is “in the black”, which is good for morale.
Once employees are transitioned to RSUs, it’s less of a concern, because they’re still making money, just less money. It’s a big concern for ISOs granted close to an IPO, though.
This is why some companies switch to RSUs within a year or so of an expected IPO date.
You are confusing ideas, unless I am misunderstanding you.
Any ISO's pre-ipo will have some strike price, that is typically rooted in some valuation- the valuation per share is really just a function of the number of shares outstanding and this routinely gets adjusted right before the ipo, but the value of those ISOs or other grant types remains the exact same- its the same as reverse split where the share price doubles, or a 2 for 1 split where the share price halves but you have twice the number of shares- its financially equivalent.
You are really concerned with the valuation of the company when your grants were given, and what the valuation of the company is on the open market, and in the case of ISOs really just where the valuation of your options puts you above water. The IPO price in itself has nothing to do with either of those things, aside from a very brief moment in time after the opening auction where the company is worth the IPO price * shares outstanding.
The only way having an IPO go down on the first day actually hurts an employee is if they start that day or are granted stock or options at the IPO price, and I don't believe this has ever happened. Stock prices don't matter, total company value does.
> The only way having an IPO go down on the first day actually hurts an employee is if they start that day or are granted stock or options at the IPO price.
This does routinely happen, because the 409A valuation for the quarter or more prior to an IPO is usually pretty close to the IPO valuation. Anybody who joins a company during that window of time will get ISO grants with unfavorable strike prices (prices close to the IPO price). These options could be worth nothing post-IPO if there’s a slump (in contrast to RSUs, which will always have value).
The difference between a company’s valuation and share price is important but irrelevant to this conversation as far as I can tell. Sorry that imprecise language on my part in my earlier comment created that distraction.
Edit: To be clear, the problem is not the bump or the slump (I tend to agree that it should be irrelevant, and if anything as a shareholder you may prefer a rational slump). Rather, it's the practice of granting ISOs at a soon-to-be market strike price that is the problem. The people with unfavorable ISO strike prices should be upset due to the strike price, not any slump or bump; but if there's a slump, they usually (incorrectly, IMO) blame the slump, and so the slump gets a bad rap internally. On the flip side, although I've never been in the position to make this decision, I find it unconscionable to offer ISOs as part of a compensation package within 6 months of an anticipated IPO date.
The employees' shares are tax based on the IPO price, not the price at which shares beginning trading.
So with a large bump (like 100% on Snowflake for example), you defer a lot of tax to the future. And if you hold out 1 year until selling, you change a lot of that gain from income into long term capital gains (which has a lower tax rate)
Any actual shares an employee owns at the IPO will not be taxed until they sell them. You might be referring to the synthetic RSUs that companies have been issuing that convert to real RSUs at the IPO (or acquisition) which does incur taxes.
In pure dollars leaving too much on the table is bad, but a nice IPO bump is free marketing for the company. A 20-30% bump means it'll lead in a bunch of news stories, and create some buzz around the company. Of course, this might be less important for a non-consumer oriented company.
A bump means people in the market are trading their shares with each other at 20-30% higher than what the company sold to the market for, that's what it means by money on the table. It's as if they sold for below market value. An IPO pop cannot immediately be turned into cash to spend, can't pay for ads with stock
