Case Western Reserve University law professor Anat Alon-Beck makes a case for regulatory reform for tech startups worth more than $1 billion
Until just a few years ago,
many talented workers chose to hustle for a promising technology startup
company, often for lower pay, long hours and a challenging work-life balance. That
was the payoff for substantial stock options and the dream of cashing out for lots
of money after an initial public offering (IPO).
That model is shifting, said
Anat Alon-Beck, an assistant professor at the Case Western Reserve University
School of Law, thanks in part to privately held tech startups valued at $1
billion or more, commonly referred to as “unicorns.”
Unicorn companies, she wrote,
have created a big problem for the traditional startup model, because their
abundance of cash causes them to delay their IPOs.
“And, as a result, they are delaying payouts for their founders, employees and investors,” said Alon-Beck. “It’s causing employee stock options to lose some of their allure as a hiring and retention device.”
In other words, employees’ investment is worth less when the company goes public—a lot less.
Alon-Beck fears this might
become the norm. There are currently dozens of companies headed to the market
saddled with debt that haven’t had enough time to build their brand.
What are the implications? For
starters, unicorns may be less likely to go public and/or talented employees
won’t want to work for innovative and progressive companies, Alon-Beck said.
“Unicorn firms must find ways
to continue to offer (employees) equity—and a promise of equity—and facilitate
liquidity opportunities,” she said.
She offered up a few solutions:
New, equity-based compensation contracts for different types of employees are needed; they could include stock grants, options for income-tax deferrals and back-end-loaded stock options to keep employees from leaving.
“Additionally, we need alternatives to the traditional liquidity mechanisms,” Alon-Beck said. Options include: direct listings (matching public buyers with private sellers) streaming music service Spotify did; using electronic secondary markets, like NASDAQ Private Market; and a secondary sale to a single buyer—that would relieve pressure for liquidity events.
Alon-Beck said there need to be reforms to the current regulatory and legislative models to remove legal barriers, among them federal securities and tax laws.
“Liquidity opportunities and
information will encourage employees to continue to exchange their creativity
and hard work for the sweat equity needed for the game-changing innovations
necessary for American competitiveness in the global marketplace,” she said.