This was bound to happen; it was just a question of when...
As long as stocks rise, everybody is willing to take some of their pay in stock. At least they were in Silicon Valley, where stock-based compensation ("stock-based comp") had become a way of life.
Stories about regular employees striking it rich are commonplace in tech. As far back as 2007, the New York Times ran a story headlined, "Google Options Make Masseuse a multimillionaire." It was referring to the company's in-house masseuse.
Obviously, some of those riches are on paper. But some are real, and it has been a great way to get paid...
That is, at least, until tech stocks started falling and employees suddenly realized they weren't as rich as they thought they were.
Which gets us to where we are today...
To keep disgruntled employees from leaving, companies have started reacting...
Just recently, Business Insider ran a story about how a leaked DoorDash (DASH), the popular meal delivery service, said it would start to "top up" its stock grants to offset the 50% plunge in its stock since November 2021.
The article went on to say...
The downturn in many tech stocks has set off similar complaints across the industry and forced companies with particularly weak stock prices to react.
Indeed, the nifty new due diligence site DuDil, run by former investigative television journalist Nick Winkler, noted similar changes at Zoom, among others.
In a post headlined, "Zoom (ZM) risks diluting shareholders in bid to keep employees," Winkler pointed to this new disclosure from Zoom's 10-K...
In October 2021, we added a feature to new and existing stock awards that provides employees with additional awards based on certain stock price criteria.
Shopify is doing something similar, with a twist...
Canadian newspaper the Globe & Mail reported that the company, whose software is used widely by small businesses for online transactions, allows its employees to choose between cash and stock. As the newspaper explained...
Previously, employees were provided restricted stock units in addition to base salaries at an allocation set by management. Now, there will no longer be a fixed amount, so employees will receive a single total compensation number and have the choice to determine how much is cash versus stock.
Of course, the good news for employees is that they'll either receive more stock or cash. That's important for morale, especially if stock prices rebound while they're still employed – and assuming they're vested.
It's a different story for investors...
If more stock is doled out the way it usually is, as a restricted stock unit ("RSU"), there's a risk an investor's stake in the company will be diluted as those units are vested. And that dilution can occur regardless of whether the share prices rise or fall, which means that shareholders may suffer a double blow from both a declining share price and dilution... sort of what's happening now.
Meanwhile, if companies do what Shopify (SHOP) is doing – and add more cash to the equation – margins and cash flow could take a hit. As The Information reported...
The shift in the balance of compensation toward cash will make the impact of headcount expenses more apparent on the bottom line.
And it will have a double-whammy impact as a wide array of tech companies – from Meta Platforms (FB) to Shopify to Pinterest (PINS) – are looking to hire more people. There's little doubt the adjusted profit margins that some investors focus on are likely to erode at some companies this year.
Likewise, as Nick Winkler of DuDil points out...
In some high-flying tech stocks, positive operating cash flow would turn negative.
The below chart, which he put together, tells that story.
