The equity earthquake
How do you hire the best tech pros when all the good eggs are taken? It may be easier than you think. In this blog, we examine why now is the best time for early-stage startups to steal the best talent from late-stage companies.How plummeting valuations created a recruitment goldmine
How do you hire the best tech pros when all the good eggs are taken? It may be easier than you think. In this blog, we examine why now is the best time for early-stage startups to steal the best talent from late-stage companies.
(Above: tweet by Jason Warner, former CTO at GitHub)
After the investment blitz of 2021, “rapidly inflated software stocks” have put some late-stage tech startups in a spot of bother. And as we’ll explore, recruiters are well placed to pounce.
These days, A-players may be more open to offers, and a recent piece in The Information gave some of the context. A combination of rising interest rates and the stalling of “pandemic-fueled growth” in areas like e-commerce has led to falling valuations at big private and publicly traded companies, leaving their stock options up in smoke. In fact:
‘Overall, proceeds from tech offerings fell 79% in the first quarter compared to the same period last year, according to data from consultancy EY. Employees at companies that had hoped to go public in the coming months might find themselves with shares that are both less valuable and less likely to become liquid in the near future.’
There was the cautionary tale of Fast, the one-click online checkout startup whose value and headcount had risen way out of kilter with its revenue. So much so that at one stage, the company reportedly bragged of its hockey-stick growth, but the Y-axis wasn’t revenue – it was the number of hires!
If 2021 was the year of spend, spend, spend, 2022 may well be the year of the ‘paper tiger’, where the likes of Fast burned through their growth capital (through over-hiring and fancy stunts) and ultimately had little revenue to show for it.
Simply put, the stock market governs the valuations of private tech companies, and if investors aren’t making their money back, down rounds are inevitable. In a sign of the times, Instacart changed its internal valuation from $39bn to $24bn, which tells us something about falling private tech valuations. In the end, these trends leave a smaller piece of the pie for employees with stock. But what opportunities does that present for recruiters?
Now is the time to bag an A-player
The aforementioned piece in The Information suggests that emerging startups are having a good time persuading ex-founders and other A-players to leave established companies and “roll the dice on upstart rivals”.
Luring the most promising candidates to a humble startup has long been a David vs Goliath battle, but now, there is a plausible story that the equity package on offer elsewhere might not be worth the gold-embroidered paper it’s written on.
“Equity offers from early-stage firms are looking more enticing,” The Information explains. “And a trend toward larger seed rounds is giving upstarts access to more cash to splash out on salaries that are competitive with the likes of Stripe and Google”.
In fact, new crypto startups “have been among the biggest magnets for workers disillusioned by their compensation prospects”, with some offering employees “tokens that vest immediately and can be sold easily, even if the company behind them isn’t close to an IPO”.
More high-calibre employees are realising that late-stage equity is often based on an unrealistic number. Instead, their chance of an upside often looks significantly better by taking a punt on an emerging startup.
Or as Jose Guardado, a co-founder of Bay Area recruiting firm Build Talent, is quoted as saying: “You see a lot more people taking calculated bets.”
Be on the lookout for those restless souls at late-stage firms, but equally, if you work for such a company, be aware that they might leave!
Why hiring ex-founders is an awesome idea
They say too many cooks can spoil the broth, but the evidence suggests that hiring ex-founders can put rocket-boosters under a startup and transform its prospects.
Shopify, for example, has five VPs of Product, four of whom are ex-founders. And writing on Substack, John Luttig waxes lyrical about Rippling (the employee management platform) which has “over 50 former founders within the company, many of whom are running various product divisions”.
So-called ‘failed founders’ are in actual fact some of the most overlooked candidates in hiring. Their ambition, experience and resilience can add value to any company, and recruiters have a rare opportunity to tap into this market.
If you’re looking to assemble a team that could give the Harlem Globetrotters a tough game, read the Intrro guide on hiring A-players.