Is the Current IPO Market a Red Giant?
A Red Giant is a small or medium star at the end of its life. The star grows in size even as it loses energy, finally transforming into a White Dwarf when it sheds its outer layers and leaves only its dense core. This process takes time and is visually impressive, but much of the splendor disappears once the fuel for the star has been exhausted.
IPO markets often work in much the same way. When markets are truly hot everyone is waiting for the perfect time to go public. After a while it seems like everyone is going public at the same time. Values soar. This usually results in fantastic headlines, but many of these companies struggle to become “core” components that will survive the transformation of the market.
This brings us to the impact on compensation. The biggest stars of the IPO universe are tech companies. The most leveraged piece of these companies compensation packages is equity compensation awards. Stock options and RSUs are the hydrogen that fuels tech startups. When the IPO market expands and transforms the best equity compensation become worth even more than imagined. Amazon, Google. and Apple are great examples of companies who have survived this cycle in the past. But if you’re anything other than one of the best companies, you should expect to be consumed or flung off into space. These companies may survive, but employees will find themselves holding equity worth little or nothing.
It is not too soon to plan for this eventuality. Performing an equity compensation risk assessment is a good place to start. Review both your strategy and tactical processes for granting stock options and RSUs. Evaluate whether your award features, vesting schedules and exercisability are optimally situated to weather Red Giant transformation. Most importantly prepare now for the possibility of making an extreme course change in 2020 or 2021. Building a new approach, educating your board and getting approval from your shareholders takes more time than you may expect.
There are also ways to “recession proof” your equity compensation programs. Most of these techniques are outside of common market data and boiler-plate plan documents. They also require a new understanding of the potentials and realities of stock-based compensation. Terms may need to change. Vesting may need a new look. Your entire program may need to be refitted and replaced. Regardless of the new approach, it will require some deep expertise.
It’s been a while since the last expansion and contraction. For many executives, HR professionals and compensation leaders this will be the first equity collapse of their careers. The least prepared will disappear into the blackness of space with little evidence that they ever existed. The best will emerge stronger and better positioned for years, or decades of continued success.
One last note. Our own sun is in this stage right now. It is still warm enough to keep us alive. It is still so far from anything drastic that we have no need to panic (We’ve got about 5 Billion years). But, like the companies hoping for an IPO, we need to be aware and plan ahead. In the case of Earth, this effort is led by scientists and science-fiction writers. The IPO market will definitely contract in less than 5 Billion years. And when it comes to compensation strategy, you’re it!