At least 5,000 tech workers could become millionaires after their companies go public later this year, according an analysis from a big data realtor in Silicon Valley.
Compass big data realtor Deniz Kahramaner estimates that at least 5,000 employees across eight companies — Airbnb, Instacart, Lyft, Palantir, Pinterest, Postmates, Slack and Uber — could become millionaires after their company goes public in 2019.
“All these IPOs are coming, and $150 billion to $250 billion are going to be unlocked in market capitalization over the next two years,” explains Kahramaner. “All those newly rich tech employees are going to have a significant impact on the real estate market.”
A new record
This year’s 5,000-plus tech IPO millionaires would surpass the estimated 1,000 millionaires who emerged in 2004 from Google’s (GOOG, GOOGL) IPO and the 1,000-plus millionaires in 2012 after Facebook (FB) went public. That this year’s crop will surpass those time periods probably isn’t surprising given the number of companies marching towards an IPO in 2019. But it does speak to sheer amount of wealth that’s about to flood the San Francisco Bay Area.
The markets where all that wealth could be felt most? Real estate and rentals. Kahramaner projects that up to 2,400 of those tech millionaires could potentially purchase properties priced at $1 million or under, while on the very high-end, just over 200 millionaires may purchase properties priced $10 million and over. These purchases will likely drive the local real estate market further. In fact, Kahramaner predicts that no San Francisco property will be priced under $1 million in five years, as a result.
Anthemos Georgiades, CEO of the apartment rental listing site Zumper, which tracks rental pricing trends across the U.S., says that while he foresees a measurable uptick in rental pricing this year in San Francisco of around 10%, these new tech millionaires won’t all jump on real estate once they’re able to sell their shares. (Employees are usually subject to six-month lockups post-IPO that keep them from selling their shares.)
The biggest impact
“The biggest impact from the imminent 2019 IPOs will be felt on the luxury end of the residential rental market, with the most likely zip codes affected being those within a short commute from the new public companies' headquarters, like Uber and Airbnb,” Georgiades explains, pointing to San Francisco neighborhoods such as South of Market.
However, some of these millionaires, many of whom will be millennials, may opt to spend their money on rentals or experiences instead. A Zumper rental survey published last November indicated that 33% of renters now don't believe the American Dream involves home ownership. The company surveyed 5,339 respondents in the U.S. last year across all 50 U.S. states.
“The mainstream argument is that the newly liquid employees will all buy homes overnight, but this is unlikely to be true,” Georgiades contends. “There will very likely be a measurable uptick in home prices this year in SF, but there are also some headwinds that will balance some of this out. … We will see many millennial employees invest their capital in experiences like traveling instead of real estate assets.”
Be that as it may, that won’t stop realtors, vying for some of that IPO money, from trying.
To calculate the number of IPO millionaires, Kahramaner devised a general capitalization table, one which breaks out startup equity distribution among early employees, based upon discussions with members of YCombinator, the 14-year-old startup incubator with alumni such as Airbnb, Dropbox, and Stripe. He assumed the valuation of each IPO company would be equal to the latest venture capital financing round. (Uber’s valuation, for instance, would be $72 billion.)
Kahramaner also assumed two stock dilution factors for each of the eight companies approaching an IPO: that each financing round the startup held diluted the company’s stock a certain percentage (10% for the initial seed round, 22% for Series A) and that executive hires, like Uber hiring CEO Dara Khosrowshahi in 2017, diluted employee stock value further. After the dilution, if a $72 billion company has an employee with 1% stock, for instance, that employee becomes worth $720 million upon IPO — at least on paper. Jake Jolis, a partner at VC firm Matrix Partners, said the methodology was sound, as did Selma Hepp, VP of Business Intelligence at Compass real estate.
NOTE: An earlier version of this article said, “Compass big data realtor Deniz Kahramaner estimates that at least 5,000 employees across eight companies — Airbnb, Instacart, Lyft, Palantir, Pinterest, Postmates, Slack and Uber — could become millionaires after their company goes public in 2018.” That timing has been changed to 2019.
More from JP: