Sagging valuations at upstart tech companies haveundoubtedly frustrated their venture capital backers in recent months. Employees who tookcompany shares in lieu of big cash salaries may well be similarly peeved. The question is whetherthey will be more forgiving of the cracks now appearing in their nest eggs. Part of Silicon Valley’smythology has been about the rank-and-file workers who hitch themselves to corporaterocket ships full of share options. Soaring equity value has been a key component of morale,retention and recruiting.
Simply based on price movements, the situation would now appear to be grim. Twitter isperhaps the most notorious example. Its shares are 7 per cent below their flotation price twoyears ago and virtually every crucial executive post at the social network has turned oversince the listing. In an illustration of its reliance on equity, more than a quarter of direct andoperating expenses ($526m) for the first nine months of 2015 at the company are attributableto stock compensation. Several other big-name tech companies are also down on their recentinitial public offering prices. Among them are GoPro (30 per cent), Box (7 per cent), and Etsy(40 per cent). Even late-stage private companies Dropbox and Snapchat have suffered sharpmarkdowns by mutual funds that invest in them.
And employee shares typically do not come with the downside protection that venture capitalinvestors are able to negotiate. As such, they are most penalised by falling valuations. But inspite of a job market that remains hot — one venture capitalist says headhunters are too busyto take his new staffing assignments — staff turnover may not be about to spike. MichaelMorell, a founder of recruiting firm Riviera Partners in California, says: “There is no groundswellof turnover. Really, only a sliver of people are affected by falling valuations and those areemployees who have joined in the last six months. Workers are still deeply in the money … Timehorizons to big pay-offs, though, have been extended. But guys who are pissed off are stilldoing OK”.
One reason employees are staying put is that, after companies go public, they shift from payingin riskier private company stock options to more stable “restricted stock” which retain valuebetter. But it may also be that tech workers are not motivated by chasing every last dollar.
Silicon Valley’s top companies — Facebook, Google, Apple, Amazon — can still hang on to theirstaff in the face of competition because they offer a combination of stable pay and perks,such as free meals and even fertility treatments. In addition, shares in these four companiesare up an average of 50 per cent this year. One former human relations executive at a bigprivate company describes the problem for start-ups: “Google and a select group of Valley firmseffectively set the bar for engineering talent. Rich cash packages and equity layered over timecreates a disincentive at best and handcuffs at worst.”
When engineers do defect, it’s not all about the money. Says Mr Morrell, the recruiter: “Moneyseems to be the second, third, or fourth priority. It isn’t the catalyst. For a lot of workers, thequestion is how much traction does the new company have? Companies are going to have toarticulate a real story to convince candidates to jump ship.”
That money-first culture may be quietly shifting on Wall Street, too. Start-up boutique bankscontinue to sprout. Founders concede that part of their calculation is the chance to keepmore of the fees they generate for themselves. But they also say that they also want to beunshackled from the bureaucracy of the big banks.
For younger financiers, private equity firms such as Blackstone have been touting generousmaternity leave programmes. Bank graduate trainee programmes, known for their gruellinghours, have softened their demands. Goldman Sachs has also implemented steps to “retainour most talented people for the long term” rather than simply allowing them to defect tohedge fund jobs after two years. Junior analysts can now be promoted directly to the nextrung — associate — without having to earn an MBA degree. Traditional MBA recruiting forbanks has weakened substantially so the move to hold on to the most junior bankers is savvy.
But even with Saturday nights no longer spent in the office, it remains to be seen what WallStreet can offer to tempt the suddenly idealistic.