An Unlikely Combo: Basketball and Underwater Equity
I’ve spent almost a decade playing basketball with Alon and I know very little about him.
My group of 15 plays together twice a week, and while we know our strengths and weaknesses on the court, we know very little about one another outside of basketball. And we like it that way. Basketball is our place to escape work, blow off a little steam and talk about unimportant stuff for a couple of hours.
A couple of years ago, we realized our professional worlds intersected. Alon is the Chief Legal Officer of a technology company and has a role in driving outcomes with his Compensation Committee. I am a Board advisor in the technology and life sciences sectors.
During some recent downtime on the court, I mentioned to him I was starting a new firm and spoke about the excitement and opportunities that come along with building a business. He was sharing with me some of the challenges with the recent market volatility and what he was thinking about as a business leader around employee engagement and retention.
We spent the next 20 minutes discussing equity strategies and what companies should be thinking about. The conversation was so engaging that Alon suggested we write an article together on LinkedIn to share our thoughts with the community and perhaps spark further conversations about how to navigate the current compensation environment.
Well, here it goes, the key discussion points from our basketball break about managing equity in a volatile market.
1. Be Proactive. We both agree this topic is front and center right now for boards and senior management teams. While there are discussions of a softening labor market, top talent is always sought after. Getting in front of the issue and understanding your company’s current situation is critical to determine what, if anything, you should consider.
Alon’s situation is like many out there – the company went public in the past few years, saw a nice run up in stock price and has now experienced a decline, despite the fundamentals of the business being sound. As we talked strategy, he said, “we need to socialize this now, get our plan together so we are ready to go in 2023, whatever direction we eventually decide to head in.”
2. Consider Everything. Many companies that go public quickly shift to full-value shares (e.g., RSUs) versus a more leveraged vehicle like a stock option. Alon asked whether companies experiencing a stock price decline should consider going back to stock options as an equity tool. I said, “Why not? Everything should be on the table.”
If I were your employee, I would absolutely love to get as many options as possible in this environment. And if getting more than typical means having some performance requirements, that would be ok, too. Staying the course with RSUs might be ok too if it is right for your company’s situation.
3. Don’t Expect Your Pool to Increase. Alon asked if he should expect their pool to increase beyond any built-in evergreen mechanics. I said, “don’t count on it, but that doesn’t mean you can’t give larger grants.”
When we see a softening of the labor market resulting in a slow-down in hiring, the amount of the equity pool typically reserved for new hires is going to go way down, and you can consider re-allocating that to your current staff.
This is precisely what we saw in the 2008/2009 downturn – companies were able to give more equity to existing staff yet not increase their dilution/equity budget because companies just moved the new hire pool of shares into the bucket for existing employees. For new senior hires, companies might also consider offering inducement shares, which have some pros and cons, but importantly, don’t come out of the equity pool.
4. Market Data May Not be as Relevant. Alon asked me, “at our current price, how can we deliver competitive market value?” Two points I made to him:
First, if people are thinking about the value today, they are missing the point. What matters is the value at the time these awards vest, in two to three years from now. The awards issued to employees in 2008/2009 were probably the most valuable equity they ever received, even though the supposed grant date value may have been perceptively lower.
Second, market data is a lagging indicator. Last I checked, the NASDAQ is down somewhere 25% to 30%, depending on how far back you look in this cycle. Any market-based compensation data reported will still reflect those higher prices and is just not as relevant today. The important point is to communicate the opportunity with these grants and the wealth creation that could occur if we execute over the next few years.
5. Communicate. Alon said, “our business fundamentals are sound, we believe in the vision, but we are in the midst of a painful market.”
Employees get it – while its ok to empathize and share your frustration, you must also remind them of the mission, what you are trying to accomplish and if you do what you set out to do, people will share in the success. These equity awards can really be used to reinforce that story.
Final thoughts: It is important to acknowledge that every company situation is unique, and every company needs to approach this through their own lens. But I will also remind us all, those companies that got it right in 2008/2009 had significant retention for their teams which propelled them forward over the next few years.
For Alon and me, it may be another 3 years of playing basketball together before we ever talk work again, but we’ll be sure to share our wisdom when we do.