When tech prices fall, companies rethink stock options

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TORONTO — As businesses scrambling to shift operations online are turning to the e-commerce giant amid the Covid-19 pandemic, Shopify Inc. Inventory increased.

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But roughly two years later, restrictions on people buying at home and online have lifted, and online growth has slowed as consumers return to brick-and-mortar stores to curb spending amid nearly 40 years of high inflation.

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For Ottawa-based Shopify’s stock price, that means an 80 percent drop from its peak of $222.87 at the end of 2021 — a harsh reality for many of the company’s equity-holding employees.

“If you’re in your early 20s and you’ve never been in a startup before, on paper, you’re like, ‘Wow, I can afford a cottage,’ and all of a sudden it’s gone in a matter of months. That can be really head-spinning,” said Chris Albinson, CEO of Waterloo, Ont. Innovation Center Communitech.

That shift is playing out around the world as investor euphoria around tech stocks fades, and speculation dwindles.

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In response, several tech companies, including Shopify, Netflix, Wealthsimple and Clearco, have slashed workforces and prepared employees for a new era of austerity to cushion the effects of the recession.

The transition is jarring for tech workers who are accustomed to increasing equity and hiring their companies, funding lavish retreats and office perks like lunches and foosball tables.

“A year ago, you might have been able to attract someone with a lower salary and a higher equity package. Natalie Romero, who has worked at Supify for four years, said she was laid off along with about 1,000 colleagues in July.

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“I don’t think equity has the same interest it once did.

Shopify seems to realize this. The new “total reward system” will take effect Sept. 1, allowing employees to choose between cash and stock options for their compensation, spokeswoman Jackie Warren said in an email.

Other organizations seem poised to follow suit.

In the year A September 2021 survey of 408 global companies commissioned by Morgan Stanley found that 46 percent of Canadian companies were considering expanding equity to a diverse workforce, while 42 percent were debating giving equity to employees based on individual performance.

They were considering offering one-quarter views — allowing employees to buy stock at the lowest of the price or at the end of the purchase period — and discounts for employee stock purchase programs.

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Think Research has been considering changing its stock option policy for more than a year because CEO Sachin Agarwal feels the changes will help the Toronto-based clinical data company “better protect its marketplace.”

“What you do in equity really affects what’s going on in the market more broadly, and that means not just how the stock market and stocks are doing, but … how other technology companies are doing,” he said.

Because household names like Google and Amazon are so ubiquitous, they can command huge salaries to attract and retain talent. That kind of money may not be available at smaller companies like Think Research, so these companies use equity compensation to attract top employees.

But as the market shifts, that sell can be tough.

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“As your stock price improves, the perception of your equity improves … and as your stock price goes down, the perception or value of your stock goes down among your skilled workers,” Aggarwal said.

Nick Beik, co-founder of Calgary Payments, said the change in attitude can be overwhelming for companies that have been raising capital at a “nosebleed” for the past two years.

Swedish “buy now, pay later” darling Klarna raised $800 million earlier this month at a valuation of US$6.7 billion, down 85% from last year’s US$46 billion valuation.

In Canada, a similar story played out for finance company Welzsimple. It was valued at $5 billion last year, with a star-studded list of investors including Ryan Reynolds and Michael J.

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Now, the company, which is controlled by Canadian Power Corp., has been cutting its 24 percent stake to $492 million, down 50 percent from $925 million in March.

“Investors tend to invest in late-stage companies that are growing at the same rate as early-stage companies, which in hindsight was unrealistic,” says Baek.

“We’re really seeing a lot of contracts and reviews and that’s forcing companies to look at their equity programs and redo any reviews or metrics.”

But fairness is not everything.

Among companies surveyed by Morgan Stanley At Work, 55 percent of employees said their current equity compensation plan was not successful in attracting or retaining talent, regardless of the equity offered.

“Every individual is different,” Albinson said.

But if you don’t like what you’re doing or the people you’re working with, you can do whatever you want for compensation and eventually you’ll be let go.

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

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