- The stock market just turned in its best month since 2022, so maybe conditions will change more quickly than many predict for high-growth tech startups.
- But the window of opportunity has been closed, at least in the short term, on IPOs, and the windfall paper riches of many tech employees on indefinite hold.
- Compensation and recruiting experts say it is time for management and employees to look beyond stock options as compensation, and for tech workers to potentially move to jobs in other sectors of the economy where paper riches aren't as important to the wealth narrative.
AI software startup DataRobot may not be a name many in the general public know, but its workers have gone through a well-known problem in the tech startup space as the market turned against initial public offerings for high-growth tech firms. Reports of internal tensions at the company included a fight over whether it should go public, and these stories were already percolating in the press before the market soured last fall and in early 2022, when the IPO market slowed to a crawl, and new offerings from old brands like Bausch & Lomb more likely to make it to the public market than hot tech companies.
Dan Wright had replaced founder and CEO Jeremy Achin last year, partly because of a conflict resulting from his resistance to taking the company public, according to The Information. There was much more to the story than that, according to The Information, but that particular angle came back into focus in July when The Information reported on Wright's departure, following anger within the company after it was revealed that senior executives were able to sell $32 million worth of stock last year when the company's private valuation peaked at $6.3 billion, while 1,200 other employees didn't get that chance.
The stock market just turned in its best month since 2022, so maybe conditions will change more quickly than many predict for high-growth tech startups, too. But the window of opportunity has been closed, at least in the short term, on IPOs, and the windfall paper riches of many tech employees are on indefinite hold. The DataRobot story speaks to a much bigger issue for startup firms: managing anger and frustration in a workforce that feels like it missed the big payout.
A DataRobot spokeswoman declined to comment.
DataRobot management may have been correct in its assessment that the timing wasn't right for an IPO in recent years. The market has shown since last November that far too many companies went public too soon. But either way, the broader relationship between management and rank-and-file employees, particularly at later-stage start-ups, is in need of a rebalance in the current market.
Some highly valued start-ups moved quickly to make employees liquid given what was happening in the public market and with investors turning against tech IPOs. Brex, for example, which ranked No. 2 on the 2022 CNBC Disruptor 50 list, announced earlier this year a $250 million tender offer for its employees. But a lot more work needs to be done to reset how companies and employees think about stock options, IPOs and compensation.
One decision employees can always make: they can walk. And that's one thing that is happening, and more frequently, to jobs outside the tech sector, according to Tom Gimbel, CEO of LaSalle Network, a national recruiting and staffing firm. "We're seeing people go to a Caterpillar or JPMorgan. Those companies have tech arms and they are … air quotes … real corporations."
While recent headlines point to cutbacks and hiring freezes not only in tech but on Wall Street too, those are more likely to be in divisions like mortgages, rather than core technology roles that bank CEOs like Jamie Dimon see as critical investments in any market to stay competitive in the future.
"Liquidity and stability are a value proposition now, and paying top-dollar cash comp. They should be going out there and recruiting like crazy," said Aalap Shah, managing director at compensation consultant Pearl Meyer, of firms in the financial sector going after tech workers.
Shah says the value proposition of equity is company-specific, and management needs to have a very good temperature on it from the employee base. "Do they believe the story is still there, the value, or is it just something they put in the drawer in a home office and don't care about?"
The DataRobot story hints at what compensation and recruiting experts say is a new divide between "haves and have nots" among tech senior executives and tech workers, and they say there are ways to respond to the employee anger about the missed monetization.
"There is this sense of being disgruntled and anxious … 'I've been in this seat doing this for some time and there was an expectation of some liquidity … why can't I have that?'" Shah said. "Unfortunately, the philosophy, the ethos always has been, it's an equity play," he said.
Tender offers like the one Brex completed, as well as long-term cash incentive plans for performance, that vest like stock, are options for management to show key talent that it is not all about the IPO.
To start, any company not doing a buyout analysis on their best talent is doing themselves a disservice, Shah said.
For some employees, paper equity is becoming less important than seeing an eventual path to monetization, and if there isn't a monetization event in site and there is no clear communication from senior management, they may be rightly asking: what's the point of waiting around?
Jason Stomel, founder of tech talent agency Cadre, says he has been advising tech workers to think about stock as being a much smaller part of total compensation. And for employees willing to take a risk on starting over again on the road to an IPO payout, it makes sense to identify companies at an earlier stage which are growing rapidly and where the product is a good fit. "There are always great companies. The risk is to make sure they are growing fast because the follow on funding, the series B and C will be more difficult to get," he said.
Transparency from management is critical, but employees, too, should be pressing for more transparency about what the future holds and where the company is trying to get, Shah said.
In many cases, the reality may be that the timing wasn't right for the company to go public. While the past decade, and in particular the post-Covid bear market public offering boom, made it seem like the deal flow would never stop, tech workers are no different than anyone else when it comes to money and timing: there are always going to be some who miss out on a monetization opportunity when the market swings from better to worse.
"The reality is no one wants what happened in 2020 and 2021 to happen again," Shah said. "Companies that were not ready to go public went public and stock prices cratered. Yes, some people make some money, but it's not really worth the blood, sweat and tears that had gone into the company."
That's not necessarily unfair to tech employees, but it's also not enough for tech management to do nothing about it.