2022 is not 2021. The fast-shifting macro-economic landscape has left many companies, investors, founders and executives bracing for stable ground and recalibrating quickly. We have observed this recalibration in a number of ways:
- IPO Expectations. Twelve to 18 months ago, clients and prospective clients frequently informed us that their private companies planned to IPO within 12-18 months. More often than not, those projections have not borne fruit (at least not yet). The reset of IPO timelines is leaving companies looking to provide executives alternative means of liquidity, but softening equity prices and a tougher economic climate have made that challenging. In some cases, companies with RSUs or similar awards requiring a liquidity event within a specified window (often, seven years after grant), or option grants that are underwater or approaching expiration, may need to address the incentive and retention risks associated with leaving those grants outstanding as is (or the precedent-creating, accounting, cap table and other related risks of re-upping talent with new grants or repricing outstanding grants).
- M&A. Merger and acquisition activity was lower in the first half of the year compared to 2021. Regardless, while companies with entrenched market positions or competitive moats are still being purchased at substantial multiples, in many cases bid prices have not met multiple expectations set over the last few years. However, for executives and companies, the impact on legal terms is not always straightforward. As pricing dynamics have shifted in favor of buyers, other deal terms may receive more scrutiny: for sellers, a strong top line price can sometimes paper over less sunny elements of a transaction. Cutting smart deals is as critical as ever, and there is often a lot of value lurking in the details. (And, speaking of details — diligence is as critical as ever, as we have found sophisticated buyers relying on robust underwriting processes to justify premium multiples in a softening market.)
- Market For Executive Talent. Despite the labor market weakening in some industries, and signs that more weakness may yet be coming, the market has generally remained strong for executives. We continue to advise many clients with excellent prospects. However, with uncertainty ahead, we have seen a renewed focus from our executive clients on downside protections (e.g., severance protections) and the cash component of pay packages that, at least over the last several years, would likely have been more appealing from an equity pay perspective. In some cases, cash is king again.
- Inflation. With inflation running at the highest level since the early 1980s, executives are confronting issues many have never seen in their professional careers. Inflationary dynamics have opened up new territory for negotiation. “Market” standards developed in low-inflationary times may have a harder time holding weight in today’s environment. Executives may look for more frequent, or even automatic, increases in cash compensation to make sure they are not falling behind by standing still. Companies may look at rising supply chain and other costs and prioritize greater flexibility. There is no “one size fits all” approach.
- Job Rescissions. Many companies were growing rapidly in 2021 at all levels, in response to the hot market and, in some cases, to “keep up with the Joneses.” The abrupt change to the market in 2022 has many companies trying to pull up quickly on that track. That has led to more job rescissions than we have seen in prior years. In less extreme cases, it has led to re-negotiation to less favorable terms than what were originally offered. For companies, rescissions can carry a lasting reputational blemish and should be considered carefully before being implemented. For executives — particularly if an offer involves a delayed start date — protecting against short-term course changes and avoiding being caught in between a resignation and a start date can be crucial.
As we proceed into the second half of 2022, we will continue to closely monitor these macro-trends and help our clients navigate the landscape.