As tech valuations plummet, companies are rethinking stock options

TORONTO — When the COVID-19 pandemic emerged, shares of Shopify Inc. soared as companies rushing to move their operations online turned to the e-commerce giant.

TORONTO — When the COVID-19 pandemic emerged, shares of Shopify Inc. soared as companies rushing to move their operations online turned to the e-commerce giant.

But about two years later, restrictions that kept people at home and shopping online have been lifted and online growth has slowed as consumers rein in spending amid high inflation for nearly 40 years. and return to physical stores.

For Ottawa-based Shopify’s stock price, that means a roughly 80% drop from its high of $222.87 at the end of 2021 — a tough reality for many staff holding company shares.

“If you’re in your early twenties and you’ve never been in a startup before, on paper it was like, ‘Wow, I can buy a cottage,’ and then all of a sudden it just gone in a matter of months, it can really make your head spin,” said Chris Albinson, CEO of the Waterloo, Ont., Communitech innovation hub.

This shift is happening around the world as investor exuberance around tech stocks fades, driving valuations down.

In response, dozens of tech companies, including Shopify, Netflix, Wealthsimple and Clearco, have downsized and groomed staff for a new era of frugality intended to ward off the effects of a possible recession.

The transition has been shocking for tech workers who have become accustomed to seeing the value of their capital rise and their company to hire, fund lavish retirements and offer office perks like catered lunches and tables. baby foot.

“A year ago you might have been able to attract someone with a lower base salary and a higher equity package. I don’t think that’s the case anymore,” said Natalie Romero, who worked at Shopify for four years before being laid off. with around 1,000 colleagues in July.

“I just don’t think (equity) has the same appeal as it once did.”

Shopify seems to have realized this. Its new “total rewards system” which allows staff to choose between cash and stock options for their compensation will come into effect on September 1, spokeswoman Jackie Warren said in an email.

Other companies seem ready to follow suit.

A study of 408 global companies commissioned by Morgan Stanley at Work in September 2021 found that 46% of Canadian companies surveyed were considering extending equity to a wider range of employees and 42% were debating equity allocation to staff based on individual performance.

A quarter were considering providing rollbacks – allowing staff to buy shares at a later date at the low of their offer period or the end of the buy period – and discounts for buy-back programs employee actions.

Think Research has been considering changes to its stock options policy for more than a year, as chief executive Sachin Aggarwal believes the changes will help the Toronto-based clinical data company ‘better defend its market’ .

“What you do with stocks is really influenced by what’s happening in the market in general, and that means not only the stock market and stock performance, but also… what other tech companies are doing,” a- he declared.

Household names like Google and Amazon are so ubiquitous that they can pay higher salaries to attract and retain talent. This type of money may not be available at smaller companies like Think Research, so these companies use stock compensation to attract the best workers.

But when the market changes, that sell can be more difficult.

“When your stock price improves, the perception of your equity tends to improve…and when your stock price declines, the perception or value of your shares tends to decline among your workers qualified,” Aggarwal said.

The change in outlook may be most extreme for companies that have raised capital at “nosebleed” rates over the past two years and have since seen their valuations fall, said firm founder Nic Beique. of payment from Calgary Helcim.

Swedish ‘buy now, pay later’ darling Klarna, for example, raised $800m earlier this month at a valuation of $6.7bn, down around 85% from its its valuation of $46 billion last year.

In Canada, a similar story unfolded for the financial company Wealthsimple. Its valuation hit $5 billion last year, when it raised $750 million from a star-studded list of investors including rapper Drake and actors Ryan Reynolds and Michael J. Fox.

Now the company controlled by Power Corp. of Canada saw the holding company cut the valuation of its 24% stake in Wealthsimple to $492 million, down nearly 50% from March’s $925 million.

“Investors invested in later-stage companies as if they were growing at the same pace as a start-up company, which was probably unrealistic in hindsight,” Beique said.

“We are really seeing a lot of contractions and revaluations, which forces companies to review their action programs and redo all their assessments or measures.”

But fairness is not everything.

Among companies surveyed by Morgan Stanley at Work that indicated their current equity compensation plan has failed to acquire or retain talent, 55% said employees are leaving for opportunities with other benefits, regardless of the shares offered.

“Every individual is different,” Albinson said.

“But if they don’t like what they’re working on or if they don’t like the people they’re working with, you can do whatever you want as compensation, eventually they’ll leave.”

This report from The Canadian Press was first published on August 28, 2022.

Companies in this story: (TSX:POW, TSX:SHOP)

Tara Deschamps, The Canadian Press

Carol N. Valencia