PayPal debuts a new rewards program that combines Honey’s discounts with other ways to earn

PayPal is taking a step away from the Honey brand, the $4 billion shopping rewards acquisition it made in 2019, with today’s launch of PayPal Rewards. The new program will replace “Honey Gold” — the rewards program for Honey browser extension users, which allows customers to redeem their points for cash, gift cards or PayPal shopping credits. With the new PayPal Rewards, consumers will be able to track and redeem their points directly inside the PayPal app, and will have new ways to earn, the company says.

The deal for Honey was intended to give PayPal a better position in the face of the increased competition in the payments space from larger rivals, including Apple, Google and even Facebook (now Meta). The battle for consumer adoption of online and mobile payments had shifted away from the checkout page itself, to compete against all the other places people go to discover, browse, get inspired and deal-hunt — including on retailers’ sites and on social platforms, like Instagram, Pinterest, and today, TikTok.

A rewards program, like the one offered by Honey, works to entice users by offering promo codes and coupons for favorite retailers, while redirecting them away from Amazon with better prices. Features like the price tracking “droplist” also help consumers find the best deals on items they’re considering. And, with last year’s revamp of the PayPal app, personalized deals and rewards became a larger part of the mobile experience as well.

This year, PayPal customers have saved nearly $200 million through the Honey cash back and discounts program, says PayPal.

With the launch of PayPal Rewards, the company is now combining the rewards being offered to PayPal customers across multiple PayPal products, including the Honey browser extension, the PayPal app, and, in the future, various card products. Rewards will also be given its own dedicated spot in a new part of the PayPal app, where shoppers can track and redeem their points as they earn. When customers want to redeem their points, there won’t be category restrictions or account minimums, the company notes, and the points can be converted to cashback at a rate of 100 points equaling $1 USD.

Once redeemed as cash, the funds can be transferred to a linked bank account, deposited into a PayPal Savings account, donated to a charity, or sent to someone else as a peer-to-peer (p2p) payment.

With the new in-app hub, customers will also be able to earn points through personalized engagement in the PayPal app, in addition to the browser extension, and will be able to be stacked with the rewards earned from their payment card programs.

This personalized engagement introduces a new way for a customer to earn PayPal Reward points by doing things like linking a debit card or bank account to their PayPal, for example. If the customer has already done so, they might be presented with a different action to take.

Image Credits: PayPal

The company is touting the move ahead of the 2022 holidays and traditionally, the biggest quarter for online shopping.

This year, however, the e-commerce landscape is looking a little different, with more spending expected to start earlier thanks in part to Amazon’s decision to host a second Prime Day event in October, leading other retailers to follow suit. Still, Adobe predicts consumer spending will still increase this year by 2.5% during the Nov. 1-Dec. 31 time frame, reaching $209.7 billion.

“With the financial challenges people face these days, brought on by rising prices and the need to tighten budgets, it can be frustrating to shop for everyday essentials or plan for the holidays,” said Greg Lisiewski, Vice President of Shopping and Global Pay Later, in a statement about the launch. “PayPal Rewards makes it easy to find sales, discounts, and great deals when making a purchase with PayPal – through cash back, discount codes, or other rewards,” he said.

Image Credits: PayPal

PayPal debuts a new rewards program that combines Honey’s discounts with other ways to earn by Sarah Perez originally published on TechCrunch

Product Managers Look For A Better Way To Deliver Products To Customers

Product managers are starting to move away from using Amazon
Product managers are starting to move away from using Amazon
Image Credit: Open Grid Scheduler / Grid Engine

So if you were a product manager and you wanted to both advertise your product to your customers and make it easy for them to buy it from you, how would you go about doing that? If you are like most of us, you would probably use your product development definition to make sure that it got included in Amazon’s inventory. After all, they are one of the largest firms out there and when people go to buy something, they almost always go to Amazon first. However, what if there was an alternative? What if there was a better way to go about advertising and shipping your product? Would you be interested?

The Problem With Amazon

There is no question that Amazon has a lot of reach. Your potential customers probably already use Amazon. If you were a product manager who was looking to boost your sales there is a good chance that you would turn to Amazon. Once you did this, you would add your product to Amazon’s marketplace. Once that was done, you could then use the e-commerce giant’s fulfillment service to package and ship the orders. This would supplement the business that you were already handling yourself. This would look good on anyone’s product manager resume, right?

Then time would march on. It is entirely possible that further on down the line you may find yourself pulling your products from Amazon. The reason that you might be doing this is because of fulfillment costs and seller fees that shaved your margins. Where could you move your online business if you were not going to be using Amazon? You could move it to e-commerce technology company Shopify, which has begun rolling out its own physical distribution service. Despite the vast reach of Amazon’s marketplace, as a product manager you may realize that if you’re trying to build something such as a brand or a relationship with your customers, Amazon’s may not be the best place. In fact, you have even noticed that at times Amazon was advertising their Amazon competing products on your Amazon page.

A lot of product managers who are looking to reach customers and fulfill orders have many more options these days. Amazon’s dominance of digital retail sales has led to a fast-growing ecosystem of startups and services aimed at matching different parts of Amazon’s sprawling network and at helping product managers and brands of all sizes meet consumer expectations set by the e-commerce heavyweight. Taken together, the businesses are creating what amounts to what could be called a virtual logistics system in Amazon’s shadow for product managers racing to keep up with the sector’s leader. This is creating new competition for Amazon even as it continues to upend traditional retail and distribution strategies.

Alternatives To Amazon

So why would a product manager side-step Amazon and go with one of their competitors? Some of the new offerings cater to product managers who may sell on Amazon but don’t want to pay the company’s fulfillment charges, or that view Amazon as a potential competitor. Product managers are not alone in feeling this way – some major brands such as Nike Inc. have pulled back from selling directly through Amazon. These firms have chosen for a variety of reasons to use tools they’ve either built themselves or brought in from other companies. The firms that are competing with Amazon include Shopify, Wix.com and Squarespace. These firms help sellers set up digital stores and process payments. A growing lineup of new and established software firms are offering tailored technology to tell retailers where to keep their inventory.

Just presenting your products to your customers is not enough. You also have to be able to ship them to your customers. New operators like ShipBob and Quiet Logistics fulfill orders for direct-to-consumer brands through their own warehouses that allow product managers put their inventory closer to customers for faster shipping, To help companies match Amazon’s growing network of distribution centers, on-demand warehousing startups such as Flowspace Inc. and Flexe Inc. connect product managers to warehouses with space to share. Robotics companies like 6 River Systems and GreyOrange supply automation to mimic Amazon’s robot-heavy handling while software companies such as Shippo, ShipHawk and ShipHero help product managers book shipments and track order deliveries.

The upstarts have built business as more established companies including the big parcel carriers have started to tailor services to businesses looking for fast and nimble ways to reach consumers. Amazon accounts for roughly 37.6% of U.S. e-commerce sales. The site’s seemingly endless range of goods has conditioned shoppers to order everything from cell phones to coffee makers online. Many expect shipping for those purchases to be fast, free and trackable. Amazon has created a huge level of expectation. However, Amazon by itself can only fulfill part of it, from a service provider standpoint. Shopify and online marketplace eBay Inc., companies that are best known for helping customers sell goods online, plan to offer physical distribution services, using technology to stitch together networks made up of third-party warehouse operators. Shopify, bought logistics automation company 6 River Systems this and has seven U.S. fulfillment locations says it gives smaller logistics providers access to technology. They can also can offer product managers lower rates than they could negotiate on their own. Shopify tells them where to send their products, and they can fulfill their products in two days to 99% of the population at a reasonable rate.

What All Of This Means For You

Product managers’ product manager job description tell them that they have products that they would like to have their customers buy. The challenge that they face is finding ways to get customers to notice their products and then getting their products to their customers when they purchase them. One of the simplest ways to go about doing this is to work with Amazon. All you have to do is add your product to Amazon’s inventory of products and allow Amazon to handle the shipping and delivery of your product. However, there are some downsides to doing this. Is there a better way?

Many product managers see Amazon as being a way to extend the business that they are already a part of. Their products can be listed on Amazon’s web site and shipped to customers from Amazon’s warehouses. However, over time product managers may discover that that the cost of using Amazon for these services is quite high. Additionally, if Amazon starts to sell a competing product they may advertise their product on your Amazon web page leading to fewer sales. Alternative providers such as Shopify have appeared in the past few years. They have created a virtual logistics system in Amazon’s shadow for product managers to use. Shopify, in partnership with PayPal, has established a physical distribution service that product managers can use to get their products to their customers. Product managers can now advertise and ship their products at lower rates then they could get from Amazon.

The ultimate goal of any product manager is to make their product as successful as possible. In order to make that happen, we have to find ways to sell as much of our product as possible while keeping as much of the money that comes in as we can. Amazon is a great way to achieve the first goal, but it may not allow us to reach our second goal. New companies like Shopify are starting to provide product managers with new options for advertising and shipping their products to customers. Product managers need to evaluate what their options are and make the decisions that will allow them to make their products as successful as possible.


– Dr. Jim Anderson Blue Elephant Consulting –
Your Source For Real World Product Management Skills™


Question For You: What other Amazon services do product managers have to consider when evaluating alternatives?


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What We’ll Be Talking About Next Time

Let’s face it, being a product manager for a hardware store does not seem like it would really be a cutting edge job. Hardware stores have been around for a long time and we all know what they do: sell a lot of different things that we can use around the house. None of this really seems to be all that well suited for an e-commerce approach – don’t you have to touch what you are buying? The Ace Hardware product managers don’t think so. They’ve made a decision to update their product development definition and try to go digital.

The post Product Managers Look For A Better Way To Deliver Products To Customers appeared first on The Accidental Product Manager.

Venmo rolls out ‘Charity Profiles’ to allow charities to raise funds directly within its app

Venmo is launching a new feature called “Charity Profiles” that will allow charities to raise funds and receive donations directly within its app, the PayPal-owned company announced on Monday. The new profiles will be available to charities that have received confirmed charity status from PayPal.

The new profile option will allow charities to reach more people who are passionate about causes in their community, directly in the Venmo app. Venmo also notes that charity profiles offer charities seamless setup, low fees and an easy charity verification process.

To set up a charity profile on Venmo, PayPal confirmed charities can visit the Venmo Charity Profile setup page and log into a confirmed charity PayPal account. Next, Venmo will ask charities to create a new Venmo account to link to a charity profile. Venmo will use the charity information from PayPal to build an associated Venmo profile. Charities will then be able to publish their profiles and share them with their communities. Charities can confirm if they are a PayPal confirmed charity on PayPal’s website.

In addition to the launch of the charity profiles, Venmo announced that it will launch a charity hub in the coming months to give customers a new way to discover causes that they care about.

Venmo charity profiles

Image Credits: Venmo

“As Venmo has continued to grow and evolve over the years, we’ve seen the Venmo community come together in unique ways to send payments of goodwill and share random acts of kindness with people in their community and beyond,” said Denise Leonhard, the vice president and general manager of Venmo, in a statement. “We have been continually inspired by how Venmo customers help one another, and support causes close to their hearts. Today, we’re introducing the ability to create charity profiles on Venmo, so that charities can now raise funds and receive donations directly from Venmo’s app.”

Venmo says 61% of donors are most likely to hear about causes through word of mouth from their friends and family, and that charity profiles will allow Venmo customers to support causes they care about.

Today’s announcement comes a few weeks after PayPal expanded further into the charitable donations business with the launch of support for Grant Payments. The product allows Donor-Advised Fund (DAF) sponsors, community foundations and other grantmakers to move their donations electronically through PayPal’s platform. In addition to moving money quickly, the system includes an online Grant Payments dashboard available to grantmakers and charities alike where they can view all the grant details, including the donor information, which can be exported to help simplify record keeping.

Venmo rolls out ‘Charity Profiles’ to allow charities to raise funds directly within its app by Aisha Malik originally published on TechCrunch

For LatAm payment orchestration startups, market fragmentation is a blessing in disguise

In the vast and varied lands between Patagonia and the Rio Grande, a region entrepreneurs and investors like to call “LatAm,” there are 38 different countries using 39 different currencies.

Only 19% of Latin American adults own a credit card, and 70% of credit cards in Brazil, Argentina and Chile can’t be used internationally. Local payment methods account for 68% of online sales, and, depending on the region and merchant networks, merchants must integrate dozens of payment service providers. Meanwhile, cash voucher systems like Brazil’s boleto bancário and Mexico’s Oxxo payment network account for a significant share of Latin American consumer transactions.

Fraud is also a major problem for online merchants in Latin America. Since the onset of the pandemic, Stripe observed that fraud rates at businesses in Latin America were 97% higher than in North America and 222% higher than businesses in the Asia Pacific.

In fewer words: The payments landscape in Latin America seems hopelessly fragmented and riddled with fraud.

To help prevent payment fraud, a solution should aggregate multiple providers and data sources into a single decision engine.

Meanwhile, the failure of one-click checkout startup Fast and questions about Bolt’s revenue suggest payment orchestration in the U.S. will remain dominated by the likes of Shopify and Stripe. Bolt and Fast wanted to bring Amazon’s one-click experience to all online vendors. After all, 75% of shopping carts are abandoned before payment, thanks in part to lengthy checkout processes.

But incumbents like Stripe and Adyen already dominate distribution channels, and they can easily extend a one-click solution. Meanwhile, checkout-only startups’ thin margins suffer under payment incumbents’ vertically integrated solutions, as well as from the “incentive wars” that payments, BNPL and checkout players wage on price-sensitive merchants.

So if one-click checkout startups are struggling to make headway against incumbents in the single-currency, highly digitized and concentrated U.S. market, it might seem impossible for a payment orchestration startup to succeed in the fragmented markets of Latin America.

For LatAm payment orchestration startups, market fragmentation is a blessing in disguise by Ram Iyer originally published on TechCrunch

PayPal debuts ‘Grant Payments’ to shift charitable giving from paper checks to electronic transfers

PayPal is expanding further into the charitable donations business with this morning’s launch of support for Grant Payments, the company has announced. The new product has been created in partnership with National Philanthropic Trust (NPT) and Vanguard Charitable and allows Donor-Advised Fund (DAF) sponsors, community foundations and other grantmakers to move their donations electronically through PayPal’s platform.

In addition to moving money quickly, the system includes an online Grant Payments dashboard available to grantmakers and charities alike where they can view all the grant details, including the donor information, which can be exported to help simplify record-keeping. The dashboard also includes other details, like the grant letter and terms and conditions, allowing the organization to decide to either accept or decline the grant. If accepted, the funds are made available in a day’s time. If declined, the organization can specify a reason and return the funds.

Image Credits: PayPal

PayPal notes that the participating U.S. charities are vetted before being onboarded to this system.

The company points to the sizable market in charitable giving as a reason for entering this space with a new product.

Citing data from National Philanthropic Trust, grants from Donor-Advised Funds hit historic levels during the pandemic in 2020, with grants from DAFs then totaling $34.67 billion, up 27% from the year prior. This was the highest increase in a decade, PayPal says in its announcement. In addition, Vanguard Charitable sent out $1.78 billion and NPT sent out $6.4 billion in grants to charities in 2021. Nearly all these payments were made via check, however.

Sending a check means relying on the Postal Service, and requires resources, time and expenses in order to manage the mailbox, retrieve the checks and make the bank deposits. This can slow down the actual work that needs to be done. PayPal believes its system, which will work much as its standard electronic payments do today, will allow charitable organizations to better focus on the tasks at hand instead of managing donations. Of course, PayPal itself also benefits by increasing the flow of money through its payments network, where it can be subject to various transaction fees.

“We are thrilled to partner with PayPal and NPT to bring modern and effective granting solutions to our donors and non-profit partners alike,” said Rebecca Moffett, president of Vanguard Charitable, in a statement. “Charities today need sustainable donor support more than ever. By streamlining the granting process, donors can make an even greater – and faster – impact on meaningful cause areas. We look forward to continuing to bring innovative solutions to the granting space, ensuring that we’re always working to increase philanthropy and maximize its impact over time.”

Eileen Heisman, CEO of National Philanthropic Trust, said Grant Payments would “simplify and accelerate how grantmakers can get funds to non-profits for mission-critical programs,” in a further statement. “The partnership with PayPal and Vanguard Charitable on this sector-wide solution could be a game-changer for other funders as well and has been enormously gratifying,” Heisman added.

This is not PayPal’s first foray into charitable giving, of course. The company has offered tools to enable charitable transactions for years. Back in 2016, for instance, PayPal added a new button inside its mobile app to connect users to its thousands of PayPal Giving Fund certified charities, which previously were only available online. It later experimented with money pools, and in late 2020 launched a GoFundMe competitor with its crowdsourced fundraising platform, the Generosity Network. Outside of charities, PayPal also offers its own grants to small businesses through Venmo.

National Philanthropic Trust will start to roll out Grant Payments later this month, while Vanguard Charitable will begin to offer the solution in 2023.

Balance raises $56M to tip the one-click checkout scales in favor of B2B merchants

There are many companies bringing one-click checkout to the direct-to-consumer marketplace, but few are developing similar tools for the business-to-business marketplace. B2B payment volume is five times the size of business-to-consumer retail payments, yet much of those payments are not being done online.

That’s where Balance comes in. The company, co-founded by former PayPal employees Bar Geron and Yoni Shuster, supports B2B e-commerce merchants and marketplaces by digitizing those capabilities through one-click checkout payment tools so companies can get paid instantly, process any payment method and offer flexible terms.

We profiled the two-year-old company last year when it raised $25 million in Series A funds, led by Ribbit Capital. Now Balance is back with $56 million in Series B funding, this time led by Forerunner. The new investment gives the company $87 million in total funding raised to date.

“For years, the consumer has led the charge in modernizing how we transact, but innovation in B2B commerce has lagged far behind the B2C space,” said Kirsten Green, founder and managing partner at Forerunner, in a written statement. “There is incredible potential to modernize wide-ranging aspects of how B2B commerce is conducted in the digital age, and the market opportunity is enormous — only 7% of the $120 trillion B2B payment volume is conducted digitally today.”

Joining in on the new round are Salesforce Ventures, HubSpot Ventures, Lyra Ventures, Gramercy Ventures and a group of B2B e-commerce leaders as angel investors, including former Shopify CMO Jeff Wisener and Faire co-founder and CTO Marcelo Cortes. Ribbit, as well as other existing investors Lightspeed Ventures, Avid Ventures, Upwest and Jibe, also participated in the Series B.

“The momentum in the business is being felt in real time,” CEO Geron told TechCrunch. “Even though we raised a big Series A round, with the new economy and challenges, we did the right step of doing another round sooner rather than later. Now we have the longevity to cross that next step.”

Last year, Balance was still in its early days, though my colleague Mary Ann Azevedo reported the company had 30 employees and experienced growth of about 500% to 600% since launching its operations in February 2021.

Today, the company has nearly 70 employees and is working with hundreds of merchants and dozens of B2B marketplaces — a 10-time increase since last year, Geron said. It targets legacy industries not as digitally savvy in payments, including lumber, chemicals, steel, retail and food.

Some of its customers include lumber marketplace MaterialsXchange, chemical supply marketplace ChemDirect, wholesale retail marketplace Abound and restaurant ordering platform notch.

Balance will use this funding for customer acquisition and to grow its team across go-to-market, engineering, sales, customer success, product and engineering and operations. Geron plans on growing the workforce to about 100 by the end of the year.

Overall, the checkout space is reflective of a new stage of the economy, Geron added. Commoditized goods are now trading online, but face an inefficient market.

“It’s not like B2C, you can’t go online and find thousands of steel suppliers,” he said. “We are taking the next step in e-commerce and doing it for the entire supply chain. Now with Balance, you can do self-serve transactions in ways that were only previously available in B2C channels.”

Treggo, armed with new funds, takes on crowded Latin American last-mile delivery sector

E-commerce across Latin America exploded in the past two years, but against an infrastructure that wasn’t prepared for all of that activity. During this time, startups have taken up the challenge to bolster the infrastructure needed for packages to get to their end destination quickly and cheaper.

That goal has created somewhat of a competitive landscape, especially within the last-mile sector. Treggo, an Argentina-based company, is among companies like 99 Minutos, Cubbo and Cargamos tackling the last-mile deliveries.

In Treggo’s case, developing technology to make urban shipments in Argentina, Mexico and Chile easier and for merchants of any size can provide an Amazon-like service for their customers. Users can receive immediate quotes, see the closest distributor and monitor deliveries in real time. The company also has a collaboration with Mercado Libre’s Flex Shipping to allow products to be received in as soon as one hour.

Matias Lonardi, co-founder and CEO of Treggo, started the company with Nicolas Torchio and Joaquin Wagner in 2016.

Speaking on the competition, Lonardi told TechCrunch that “e-commerce has been so aggressive here.” Treggo was initially working with all independent drivers, but when more and more companies got into last-mile deliveries, the space became crowded because the barriers of entry are low.

“Sixty-two percent of the sector is dominated by small and local last-mile providers,” he added.

With everyone trying to break into this sector, the company decided to shift its focus to digitize the delivery process so that all merchants can have SaaS-like tools to improve their operations. Treggo now works with thousands of last-mile providers and gives merchants information on the best delivery provider in a certain zip code through one integration and touchpoint.

In addition, it is also providing an embedded finance feature for its independent driver network to give them cash in advance. Treggo paid 20% of its revenue to drivers over the past six years to buy new vehicles and increase their operational capacity with the company.

Fifty percent of Treggo’s delivery orders come from Mercado Libre, which Lonardi says has been a good partner for the company. Its Mexico operations are still in its first year, but it is growing 20% monthly and has 70 customers there. In the last six months, Treggo also started delivering in Colombia.

Overall, the company is working with 378 monthly customers and delivered 1.8 million orders in the past 12 months, moving 220,000 parcels per month on average.

Lonardi says the company attempted to go after funding early on but noted that the angel investor landscape was not as prevalent six years ago. So the founder group decided to bootstrap the company and did so for four years. When they wanted to start operations in Mexico in 2020, the company decided to try again and was successful in raising $600,000 from a family office with ties to the logistics sector and then another $500,000 last December.

Today, the company announced it raised an extra $1.7 million that it closed on two months ago from Newtown Partners (Lonardi said this is the firm’s first LatAm investment), Verve Capital, Latin Leap, Bluewatch Ventures, Kube VC and a group of individual investors, including Alan Rutledge, Austen Allred, Matt Brown and Ivan Montoya. This gives Treggo a total of $2.8 million in funding.

That funding gives Treggo some runway to more aggressively target Mexico and to begin thinking of a future in Brazil, Lonardi said. The company has 70 employees and expects to grow there, too.

“The good thing for us is that Argentina was well-developed with e-commerce trends, so when we went into Mexico, where it is two or three years behind Argentina, we knew how to scale there,” he added. “Mexico is just getting started, and it is the fastest-growing in all the world, so there is a huge opportunity. If you do it right, and do your homework, you could be a unicorn in this space.”

Stripe’s new and lower internal valuation, explained

Stripe has been in the news this past week for lowering its own valuation to around $74 billion from $95 billion, a 28% decline that  made waves in startup-land.

Given the company’s size and its status as one of the most richly valued startups in history, the payments giant carries significant weight in the private markets. It’s worth taking the time to make sense of this internal valuation cut, especially to understand if the move is as bearish as the big numbers might lead some to believe.

The Wall Street Journal reported that Stripe’s new valuation was not set by a new funding round, but instead a new 409A valuation. Recall that 409A valuations are set by third-parties, which means that they are not tied to what a venture backer or other investor thinks. It’s an IRS-regulated process that measures the value of common stock against public market comps to help set a fair market value.


For more on 409A valuations, TechCrunch recently wrote an explainer that is worth your time.


It’s not hard to see why Stripe’s internal valuation is falling. The value of public companies has declined in recent quarters, and technology companies, in particular, have taken a slew of punches after spending several years in the sun, warmed by enthusiastic investors in both the public and private markets.

Within the gamut of tech companies, fintech has seen the steepest valuation retreats. Global fintech funding in the second quarter of 2022 fell 33% to $20.4 billion across 1,225 deals in Q2 from Q1 2022, per CB Insights, and declined nearly 46% from the $37.6 billion raised across 1,287 deals in Q2 2021.

WTF is a 409A?

In the past few months, both Stripe and Instacart have seen their internal valuations updated in a 409A appraisal process. The startups saw their valuations being slashed by 28% and 38%, respectively, as a result of the appraisals.

What do these re-pricings signal to other late-stage, pandemic-spurred startups? And how seriously should we be taking them? We spoke to Carta, AngelList, EquityZen and others to better understand the 409A process, and why tech companies might actually want a lower valuation in this moment.

What is a 409A?

409A appraisals have become commonplace throughout the tech industry since the Enron scandal, which sparked their creation. In response to some of Enron executives’ misdeeds, Congress passed Section 409A of the IRS tax code to govern how companies issue stock options to their employees.

While it’s not mandatory for companies to receive 409A appraisals, the IRS has made them all but compulsory for private, venture-backed companies, Kevin Swan, co-head of global private markets within Morgan Stanley’s workplace solutions division, told TechCrunch. Swan’s team regularly conducts 409A valuations for companies, in addition to providing services such as cap table management and startup compensation data.

The IRS advises companies to use a fairly determined reference valuation to assess a strike price for the restricted stock units (RSU) and options they grant to employees, Swan said. Put simply, a company can point to a 409A valuation and tell the IRS that someone else has made an assessment of what the common stock of a company is worth. If they don’t do this, the onus is on the startups to determine their own fair market value in case the IRS comes knocking.

While most public companies can just issue RSUs and options at a strike price equivalent to their share price at the time of issuance, private companies obviously don’t have public share prices they can reference to ensure their valuations are fair.

That’s where third-party 409A providers come in, Phil Haslett, founder and chief strategy officer of EquityZen, told TechCrunch. He said that nearly every tech company that has raised more than $5 million and has more than 10 employees will go through the 409A valuation process at least once a year.

Companies are also expected to seek a new 409A valuation whenever they suspect a material event may affect their value, such as raising a new funding round, making an acquisition or (ahem) weathering a significant market downturn. The cost of a new 409A figure can range from $1,000 if it’s a smaller startup or up to $20,000 if it’s a late-stage company.

It’s important to note, though, that 409A valuations are both completely separate and often quite different from the implied valuations determined by investors in a funding round. Although a funding round can prompt a company to seek a 409A assessment, the 409A valuation itself is conducted by a third-party firm akin to an auditor.

These firms usually consider different factors than what VCs look at. Founders basically argue that since investors are buying a different kind of stock, they are also buying into a different kind of valuation.

“I think the thing that a lot of companies won’t say out loud, but it’s generally known, is that 409A valuations almost always come out lower than recent funding round valuations,” Haslett said. In other words, the 409A is a conservative valuation, while an external valuation chosen by investors can be a little more lofty.

One reason for this discrepancy is that investors in startups get preferred stock. So, they tend to ascribe higher valuations to their portfolio companies than a 409A provider would, because common equity is typically valued at a discount to preferred stock until a company goes public. 409A valuations usually only impact the value of common stock, as repricing preferred shares as well in a 409A process is tedious and, therefore, relatively rare.

The second difference lies in the valuation techniques and underlying projections used in a 409A process.

When conducting a 409A valuation, a third-party firm will typically use two methods to discern how much a company is worth. The first is the comparable companies method, which looks at other industry players to determine an appropriate valuation multiple to apply to the business being assessed. It’s almost formulaic: 409A assessors will tell a startup what public market companies they look like, and the more mature the startup is, the higher the impact public stock prices can have on the startup’s valuation.

In Stripe’s case, the 28% valuation haircut is significant but is dwarfed by the declines some of its public peers have suffered. Block, formerly known as Square, is down nearly 80% from its 52-week high, while PayPal has seen its value retreat around the same amount in the period. Shopify’s stock price has declined around 82% compared to its 52-week high, and the list goes on.

“If you’re Stripe right now, I imagine a couple things happened,” Haslett said. “One thing is definitively true, which is that publicly traded fintech companies that are likely considered your peers or your competitors traded at much lower valuations than they used to. The second may be that you have revised your guidance upward or downward based on the new environment you’re in.”

The second method to determine a 409A is discounted cash flow valuation, Haslett explained. It’s a standard formula used by auditors and bankers to size up companies, but it isn’t always applicable to early-stage startups because it relies on cash flow projections, and many of these startups aren’t profitable.

What’s more, companies often intentionally provide a more measured set of projections to 409A auditors than they do to their investors. They do this so they can get the benefits of having a low 409A valuation. Although sending auditors and investors two different sets of financials is common practice, Swan noted that companies still need to walk the “tightrope” of sending auditors projections that are high enough not to set off red flags.

So, is having a low 409A valuation a good thing?

Yes. Especially for employees.

When a company’s valuation drops and the public gets wind of it, it’s usually perceived in a negative light. A valuation cut typically signals that either the company itself is struggling or that investors are pessimistic about market conditions. While those concerns tend to hold true for companies that see their valuations being slashed in funding rounds, they’re not always applicable to 409A valuation cuts, Haslett said.

In fact, many founders and industry experts see a company receiving a 409A valuation that’s lower than its investor-assigned valuation as a boon. That’s because a low 409A valuation allows companies to grant their employees stock options at a lower price. Companies can also use the new, lower 409A valuation as a recruiting tool, luring prospective employees with cheap options and the promise of cashing out at a higher price when the company eventually exits.

Sumukh Sridhara, head of founder products at AngelList, says companies view 409As as an “internal equity granting authorization mechanism, and not them thinking we’re worth less.”

“If those companies would have their way, they would argue that they are worth 5% of what their public market comps are. But they won’t really get away with that,” he said.

AngelList launched AngelList Stack last year, which offers a suite of founder-focused products, including a 409A valuation tool. Sridhara says that since most startups on AngelList skew early stage, “their argument is that their stock is worthless” so they can grant options and equity more efficiently.

Since 409As potentially help startups with recruiting and retention, an updated internal valuation could mean that a company is trying to sweeten the deal for future employees and is making moves to hire.

Sridhara provided the following example: If an employee is granted 100,000 units of stock, it’s in the employer’s best interest to make that stock look — to a 409A analyst — like it’s worth $1 instead of the $10 per share price that venture capital investors may have paid to get into the same company. If you can make the case that the shares are only worth 50 cents a share, employees’ cost to exercise those shares is now $50,000 instead of $100,000, so “it’s more advantageous for the employee, and they get a little more upside to their capital gains,” he added.

Companies can also go back and revise the strike prices they had assigned to already-issued options, according to Swan. He noted that while the process of getting these options repriced can be quite tedious from a cap table perspective, many companies choose to do so because it helps them retain employees in addition to attracting new ones.

The price of employee stock options matters, especially in an environment riddled with inflation, a down market and employment volatility. A quarter of American startup employees can’t afford to exercise their stock options, both because of financial risk of exercising and paying taxes, or because they can’t front the cash, according to an EquityBee survey from earlier this year.

“Employees and new hire offers are extremely sensitive to what the 409A is, because it determines how many shares they get,” Sridhara said. “If you’re out there in the market, and your valuation is $100 billion, but you can’t credibly convince existing or new employees, you end up being a little less well-positioned.”

Stock options can also have particularly acute effects on employees who are laid off from tech companies, according to Haslett. Any vested options typically expire within 90 days of a person leaving a company, whether they leave voluntarily or not. If an employee is forced to exercise their options when the 409A valuation is high, they’ll likely be on the hook for substantial capital gains taxes.

That’s partly why some companies will request a 409A appraisal before conducting a large round of layoffs, according to Haslett.

“The least you could do is update your 409A valuation before you can let all these people go so that their tax burden is a lot lower, and it makes it a little bit less difficult for them,” Haslett said, though he also noted that there are also many other reasons why a company would ask for a new appraisal.

For later-stage companies, especially those with a lot of secondary activity, 409As can get updated on a more frequent clip, either quarterly or monthly, instead of annually.

We’ll note that getting a lower 409A valuation isn’t always the result of a company playing offense. Instacart cut its own valuation in March, but months later, one of the company’s investors cut its valuation of the company even further. Stripe’s internal valuation cut comes after Fidelity cut its valuation of the fintech by over 35% this year.

Ultimately, companies seeing their 409A valuations go down are still reacting to adverse factors that are negatively impacting their business. Often, they will get a reappraisal to prevent their employees’ options from going completely underwater rather than to actively lure new talent.

Are Instacart and Stripe kicking off a trend?

Now that we understand the basics of 409As, the next logical question is if we’ll see more companies seek a 409A valuation repricing amid the downturn. Sridhara said that he’s seeing more founders turn to AngelList for help with reimagining their equity compensation structure.

“Companies do refreshes, whether they like it or not, because they have so much secondary market activity that their legal team will make them,” he said. “You need to be informed about your grants.”

It can get really complicated, too. Data from Carta shows that the number of companies not updating their expired 409As has increased. Chad Wilbur, VP of valuations at Carta, told TechCrunch that in May 2022, the number of companies expected to update their 409A due to an expiration was 19% lower than expected. In June, that number rose to 24%.

While Wilbur declined to comment on why Stripe and Instacart updated their 409As, he did say that many companies aren’t updating their 409A valuations “likely because things are so uncertain right now.” Also, because these internal evaluations result directly from companies granting options to employees, this inactivity in seeking 409A assessments may mean that fewer companies are actively hiring at the moment.

Meanwhile, Carta is advising customers to consider updating their 409A if one or more of the following is applicable:

  • If the company raised capital in late 2021 or early 2022 — in favorable conditions that have since passed. “If a company raised capital during this period, it may be eligible for an equity adjustment that could potentially lower its valuation,” Carta says.
  • If the company has made significant changes to their forecasts due to the “prolonged downturn.”
  • If the company is considering raising capital in the foreseeable future.
  • If the company is slowing down cash burn given the funding market. “If a company has less available cash, it may need to be reassessed for the risk associated with limited funding,” Wilbur wrote in an email.
  • If the company is planning an exit in the next 12 months. “The road from private to public is taking a lot longer as the IPO market has slowed due to market volatility,” Wilbur wrote. “Companies likely need to revisit any assumptions made about the expected time to exit — especially if they operate in an industry that’s seen a significant decline in the public stock market, like technology.”

In other words, most companies — unless they are completely heads-down, bootstrapped, or have raised in 2020 and have no desire to raise again soon — should be rethinking their 409A valuations, according to Carta.

While the data doesn’t yet support a trend, EquityZen’s Haslett thinks that more startups will request appraisals in the future, hoping to take advantage of today’s market prices to land lower valuations.

“I think there’ll be less stigma around it soon. Employees, in particular, [will say] “Oh, yeah, this is better for me,'” Haslett said. “I feel like investors, if at first they got some sticker shock by seeing [the lower valuation], they’re going to be like, ‘Oh yeah, if public markets are down 40% or 60% or whatever, it’s not that surprising that the privately held companies that have similar profiles are down that much as well.'”

Dutchie Pay wants to help you stop paying in cash for your cannabis

Cannabis is now legal in a number of U.S. states, but because it isn’t federally legal, this “legal” status only does so much for cannabis businesses. While dispensaries can sell cannabis products legally in many states, they don’t have access to the same banking facilities that any other retail business would.

As a technology platform for cannabis commerce, Oregon-based startup Dutchie is cognizant of the complexity of the problem it is trying to tackle. “We are frankly a little bit and kind of in the stone age when it comes to payments and cannabis,” co-founder and chief product officer Zach Lipson told TechCrunch.

“It really forces the industry to rely on cash,” he said, pointing out that 90% of all dispensary transactions are handled in cash. This figure might be a tad high or slightly outdated, as it comes from a 2020 report by research firm Aite Group, prepared for Emerging Markets Coalition (EMC), an advocacy group for financial services in the cannabis space. But the point remains: Cashless transactions are often not an option for cannabis businesses.

Zach and his co-founder (who is also his brother and the company’s CEO), Ross Lipson, aim to solve that problem with Dutchie Pay, a payment solution that is designed for the legal cannabis market in the U.S.

How it works

If you’re buying legal cannabis for medical or recreational purposes, you might be able to place an order on your dispensary’s website, but you’ll still have to pay cash upon delivery or pickup. This is where Dutchie Pay comes in.

Dutchie Pay’s moniker is reminiscent of Apple Pay, and that’s not a coincidence — Dutchie also has ambitions to be a one-click payment system.