According to a WSJ report, Instacart’s planned IPO is not for raising capital to grow their business but instead to sell employees’ equity. It is not a good time to IPO right now as the IPO stocks have been battered this year. Shares of DoorDash, the most comparable company to Instacart in the public market, dropped 60% YTD despite beating their quarterly earning expectations over and over again. According to WSJ, Instacart actually turned a net profit and saw revenue grow 39% from the year-earlier period in the most recent fiscal quarter.
I suppose the main question on investors’ minds is why Instacart wants to IPO so desperately right now. They are certainly going to IPO at a deep discount to the $39B valuation they fetched in March 2021. I believe there are two main reasons. The first is that the very early employees’ RSUs(restricted stock units) might be expiring. RSU holders are not allowed to sell shares in the private market and the RSUs will expire after a predetermined period, typically 5-7 years. Technically, the company could reissue the RSUs but there will be many legal and tax implications for re-issuance. IPO will be a good solution and this type of semi-forced IPO happened back in 2020 for AirBnB. The second reason is that they want to assure current employees that their stock-based compensation, which is typically a large percentage of the total compensation for startups, is worth something. I think these are legitimate reasons but their public market valuation will probably be hit really hard.
The most interesting part of the IPO plan, according to WSJ, is the following:
While Instacart will sell a small percentage of new shares, the bulk of its offering will come from employee shares that will be sold directly to new investors at an agreed-upon price ahead of a stock-market debut. Details of the listing could change depending on market conditions and other factors.
Basically, instead of waiting for the IPO lockup period to expire, many of the employee shares will be sold at the IPO. This is a big red flag. This plan is telling us that the company is not confident enough that their stock price will hold up for employees to wait for the lockup expiration (typically six months after IPO). In addition, this IPO is going to be a down round. Investors who invested at a higher valuation are going to get more shares due to the downside protection terms in most late stage deals. There is going to be quite a bit of dilution at IPO because of the downside protection and more dilution down the road due to the stock-based compensation. They are using Goldman Sachs to sell the IPO shares. I am an Instacart customer and use them at least two times a week. But they have a difficult business model, fierce competition from DoorDash and based on the signaling for their IPO, I will stay away from owning their shares.