The lunch room at Pinterest. The lunch room at Pinterest. Christie Hemm Klok/WIRED

So you got a job at Pinterest as a product manager. Yea! You’ve got a generous salary, free lunch, a dog bed under your desk for Scout, and a plethora of stock options that will be worth, well, a lot. Probably. Someday. Maybe.

This company is worth $11 billion! On paper. But that’s a bet on the future, not an actual measure of the company’s worth.

As 2015 wraps up, most investors agree there may be a bubble in late-stage funding—the kind of investments that turn promising young startups into so-called unicorns just months after they’re launched. There could very well be a “correction”—that is, a broad realization that these mythically valuable creatures exist only on paper.

But this time, the fall of once-vaunted startups won’t be like the big public company bust of 2000 that drained so many retirement accounts. This time, the overvalued companies are mostly private, and their investors are professionals—hedge funds and venture capital firms. Should many of the unicorns fail to live up to their lofty valuations, these investors will lose money, and since they’re investing on behalf of others—pension funds, university endowments, millionaires—the economy will feel the effects. But they won’t be nearly as acute.

All of which sounds great—unless you work at one of these companies. YCombinator president Sam Altman, speaking at a New York tech event last month, said, “The people who get hurt most often are employees at these startups who look at these valuations and think they aren’t pretend.”

And in a sense, these soaringly optimistic estimations aren’t pretend. Someone is betting the company is worth that much. But as Benchmark partner Bill Gurley has repeatedly pointed out this year, a company’s value is determined at IPO, when the public markets weigh in on the value placed on it. That’s often when employees can cash in, too. So if these companies are overvalued and the public markets judge them to be worth less, employees could have a lot to lose.

Yes, it’s hard to feel too bad for workers who ride scooters around the office, sip free Kombucha tea all day, and then don’t become millionaires. But the thousands of people these unicorns are fast snatching up include plenty of hard-working adults—many of whom aren’t even in Silicon Valley—who agree to moderate salaries in hopes they’ll make it up when the stock pops. And they’re not working nine-to-five jobs. Startup culture demands complete allegiance. You are expected to give yourself over to the mission fueling the company–not just your time, but your personhood. If the company that demanded your all disappears, you’re not just left with worthless options. You’re left with worthless promises.

The Big Gamble

For many startup employees, the reward system doesn’t work like it used to. Back then, you would take a meager salary and work long hours with the hope that your employer would go public and your stock options would become valuable. It was risky. Plenty of startups failed, but employees would quickly move on to the next venture.

That stopped being true awhile ago as companies chose to stay private longer. For startups, an initial public offering once brought better access to capital, stronger branding opportunities, and a broader group of shareholders, but many businesses can now access capital and marketing attention without going public. The JOBS Act amendment to the 500-shareholder limit allows them to stay private longer. And the demands of quarterly reporting, along with the transparency it requires, don’t seem worth the trouble. On average, companies wait 11 years to go public. Thus employees began to be faced with longer timelines before they could cash in their options.

Five years ago, a number of startups popped up to help employees cash in on their options before companies went public. The most visible of these was SecondMarket, a marketplace for trading shares of private companies. In 2011, people celebrated it as an innovation that helped with employee retention and opened the closed circle of professional investors to a more democratic process. More people could get in. Suddenly, employees and other early shareholders could sell pre-IPO Facebook and Twitter shares to interested investors.

That experiment quickly went south. The process descended into chaos as startups struggled to manage random investment funds in their cap tables at valuations that were all over the map. What’s more, they had to figure out how to comply with the insider trading laws, which apply to private companies as well as public ones. It was expensive and generally, a pain. Startup CEOs and investors began to ban secondary markets. By 2012, SecondMarket had pivoted its business model to offer private tender options, which provided companies more control over the process. Companies could determine who was allowed to invest, who could sell, and how much of their stake they could shed.

Finding Value

It might be complicated to allow employees and early investors to turn some of their vested options into cash, but there are good reasons for doing it. For one, companies struggle to retain talent, and if, over the course of a decade, their best people get better offers—or offers likely to become profitable sooner—they may leave. Offering an earlier path to the kind of cash that can help someone with a home down payment or a child’s college education is a smart way to hang on to talent. For employees, it’s a hedge against the future. In the event that they chose the wrong unicorn, it’s a way to unlock some of the promise before the opportunity is gone.

Last year, NASDAQ launched a private market business to help provide employees liquidity–and in the process, get to know the unicorns in advance of their public offerings in hopes of winning their listing business. In October, it purchased SecondMarket for an undisclosed sum. I spoke to Jeff Thomas, who is President of Liquidity Solutions for the private market business (and used to work at SecondMarket), about how the process works. He’d just announced that NASDAQ will help Pinterest offer a structured liquidity program that will allow employees to sell a percentage of their vested equity. While he won’t disclose how much, he says in these types of programs, employers usually allow employees to sell between 10-20% of their vested shares. “They get some cash in their pockets, and the other 80-90% of their holdings now have real value in their minds,” he told me. Thomas said that earlier in the year, NASDAQ conducted a third party tender, in which outside investors got to set the share price, for Pinterest.

It’s a smart way for companies to help their employees insure against an uncertain future. If employees do get burned, its tempting to let them take the blame. Startups are risky businesses! And likely, they’ll be able to find work someplace else. But there’s a danger for the larger economy here as well. Talented people may be more risk averse next time—less willing to take a chance on the next big thing. And that affects all of us.


If the Unicorn Bubble Bursts, Workers Will Feel It Worst