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Navigating equity in a downturn: inside a Ledgy fireside chat with btov’s Andreas Goeldi

Yoko Spirig
Co-founder and CEO
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Tech valuations and multiples have come under pressure in the last year, but there has maybe never been more interest in startup equity. What happens to people’s ownership stakes if their company’s valuation dips? How should leaders communicate about equity plans with the company? And how does this market correction compare to the other big tech busts in 2000/2001 and 2008?

To get an insight into the potential consequences of this market correction, Ledgy CEO Yoko sat down with Andreas Goeldi of Swiss/German VC btov. As a former entrepreneur and veteran investor, Andreas has experience of past downturns and recessions – and his advice to btov’s portfolio companies (including Ledgy!) is always valuable. So what insights could Andreas provide to other companies thinking about their equity strategies right now?

Here’s the discussion between Yoko and Andreas, which took place in late February 2023.

The macroeconomic picture

YOKO: Welcome Andreas!

I’ll kick off the discussion with some macro context. The tech sector has seen more than 250,000 job losses since the market correction began. Companies are now looking to conserve cash and in many cases, optimize for efficiency over ‘growth at all costs’. So how does this present moment compare to the previous downturns you have been through, such as the 2000-2001 crash and the 2008 recession?

ANDREAS: First of all, in previous downturns the tech market was much less mature. Today, the software industry has so much more capital, the networks are much more sophisticated, and governments also have a better understanding of how important startups are. So I think in a macroeconomic sense, tech companies are better positioned to weather the storm than they were before.

YOKO: A more robust sector is a good thing, but the current environment is definitely not easy for companies or founders. So how should founders navigate uncomfortable conversations with the board while still being the company ‘cheerleader’?

ANDREAS: It’s a difficult challenge, because as a founder one of your jobs is making sure you are keeping the lights on and surviving if your business is badly affected by the economic environment.

But markets are cyclical, and it’s extremely important for leaders to keep their teams focused on the long term. I’ll give you an example. In 2000, the company I founded had 230 employees. In the crash, we had to do a brutal turnaround which meant reducing the company down to 90 people. But because we made those difficult changes, we were able to later grow to 600 people and give many people a financially successful exit.

The trick is to plan for scenarios: prepare the business for very bad scenarios, but keep a good scenario in your back pocket. Things are rarely as good or as bad as they seem, so it’s important to stay flexible.

The role equity plays when times are tougher

YOKO: I also want to ask you about equity in moments like these. In your experience, what difference does it make for companies to offer equity and share ownership to their teams? Does it become more or less important in a crisis?

ANDREAS: I think it becomes even more important. It’s interesting now, because maybe in the last few years you had people joining startups with a bit of a ‘get rich quick’ mentality. Now, IPOs might be further away, and the tech bubble of the last couple of years has kind of burst.

So how do you incentivise people in a more patient way, more focused on the long term? The answer is equity – it is designed to reward people for their efforts over years, not months. Your important team members will be with you through thick and thin, and you have to find strong levers to reward them for their efforts.

YOKO: Another consequence of the atmosphere in 2021 was companies raising at very high valuations. Now, founders and the broader team might be wondering: if we next have to raise at a lower valuation due to market conditions, what happens to my equity?

ANDREAS: I think there are two quite separate situations here. For early-stage companies, the valuations in early rounds were still reasonable and are currently not dropping by much. There is more room to achieve real scale in the years ahead, so I think for younger startups the issue is not so bad. Valuations really make a difference for later-stage startups, where an exit was maybe imminent not long ago but now things are more up in the air.

So for these companies, the pragmatic thing to do would be to reissue options at a new price to reflect a lower valuation. This is the practical way to keep people incentivised. It isn’t cheap – we are seeing Stripe potentially raising billions to cover taxes on its employees’ RSUs. But it is necessary if you want to keep your culture and keep your team aligned.

And the other boring piece of advice is to keep an open dialogue with tax specialists, to make sure you know what the implications of new fundraising rounds and new option prices are going to be down the line.

Managing layoffs fairly and compassionately

YOKO: And so now I want to turn to layoffs, and how companies can handle this process in a way that is fair for all stakeholders. It is a horrible position to be in, as a company and for the people affected. But how should companies treat equity in these situations?

ANDREAS: First of all, it is very important to be supportive and considerate, not only because it is ethically and morally the right thing to do but because it pays back the business in the long run. When my company conducted layoffs previously, the people who left found new jobs and quite a few decided to become customers of our company. They still had a positive feeling towards us because we treated them fairly in a difficult situation.

You should establish principles on elements like vesting. At a minimum, vesting should continue until the end of the severance period. For people who are close to their equity cliff, you should think about a way to qualify them early for at least the 25% of their equity grant.

Then, how much time do you give affected employees to exercise their options? Giving as little as 90 days is pretty brutal and forces people into a complex financial decision at a tricky time. Plus, you are then giving a big sum of money to the company that just laid you off. How does that make you feel? Happily, we are increasingly seeing companies give employees 5 or 10 years to make this decision, which is much healthier.

If you deprive people of their equity in these circumstances, it rebounds back on you in terms of your reputation in the market but also in the morale of the team that remains with you.

YOKO: And lastly I’d just like to ask about communication. What is the right way for founders and leaders to maximize transparency within the company? How do you know where to draw the line in keeping everyone in the loop with financials, equity, etc?

ANDREAS: We both think and talk about equity a lot, and the average founder will probably know a lot more about equity than the average employee. So we should not forget that for lots of people, equity is a totally foreign subject about which they know very little. So it’s very important to spell out in simple terms what equity means for people in their own lives. Otherwise, people are just going to be put off.

In the past I’ve had people who didn’t understand equity well enough, so they didn’t participate in our option scheme. Unfortunately, those people didn’t have the same financial outcome as those who did participate, and that’s a consequence of us as leadership not investing enough in education. Most companies underinvest in education here, even today, and as a result equity seems scary when it in fact isn’t.

In my career I have never regretted being transparent with the company; I have regretted not being transparent enough. Hopefully that can guide some founders and executives on what disclosure is worth the ‘risk’.

What the future holds

YOKO: Very interesting and good food for thought! One final question: where do you see equity in Europe five years from now?

ANDREAS: My hope is that Europe catches up with the United States in terms of equity for employees being totally normal, well understood by employees, and more standardized across markets. Software like Ledgy really helps companies navigate this complexity, of course, but I also wish CEOs and CFOs spent less time on the tactical, time-consuming side of running an equity plan and freed up more time for strategic thinking.

YOKO: Thank you Andreas for a hugely insightful conversation!

Interested in more interviews, including with Ledgy customers? Watch more webinars from Ledgy.

Yoko Spirig is Ledgy’s co-founder and CEO. Prior to founding Ledgy Yoko studied physics at ETH Zürich, Oxford University and CERN. She was project lead on Swissloop, Switzerland’s first Hyperloop research initiative.

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