Wealth After an IPO Can Cause Employees to Go
On an individual level, employees who have suddenly gone from Joe Blow to King Midas may have serious problems coping with the change. Experts call it ‘sudden wealth syndrome.'
Groupon Inc. began selling its stock Nov. 4 in an event that was far more successful than had been anticipated for the daily-deal company.
The Chicago-based company's initial public offering had the effect that the public has come to expect for Internet startups: Multiple employees became millionaires overnight, at least on paper. CEO Andrew Mason, along with a handful of investors, was an instant billionaire, at least temporarily.
Despite a quick drop in its per-share price—as of Dec. 7 Groupon was trading at $20.43, down from it's high of $31.14—the IPO also brought to light other people management issues faced by companies when their employees earn instant wealth. The company raised $700 million in the largest U.S. Internet IPO since 2004, when Google Inc. raised $1.7 billion.
"Google is one of the great American stories," says Scott Sweet, senior managing partner of IPO Boutique, a Lutz, Florida-based research firm. Sweet says Google was masterfully prepared before launching its IPO, with excellent management and a solid (and generous) employee compensation plan in place.
More than 900 of the Silicon Valley company's 2,300 employees at the time became instant millionaires. More than half of those instant millionaires were worth more than $2 million. Google's founders became billionaires.
And that was just on the first day, when Google shares were $85. Three years later Google shares peaked at just over $700 per share. That's about when Google looked around and noticed that a big chunk of its original employees, 100 of the first 300 people ever hired, had left the company, the San Francisco Chronicle said. Fabulously wealthy, they had resigned and moved on to new challenges—or perhaps to long, lazy days on new yachts—taking with them considerable institutional wisdom and culture.
Offering generous stock options is seen as a way to attract and retain key employees. But the newfound wealth can create problems for companies and their employees. As Google did, a newly created public company might witness the departure of many of its valued employees after their shares have vested (typically after six months).
Disparate levels of wealth among employees, according to their time of hiring and concomitant value of shares, may create friction or morale problems that could chip away at the company's core culture. To handle such post-IPO problems and help the company stay true to its values, Google appointed a chief culture officer.
On an individual level, employees who have suddenly gone from Joe Blow to King Midas may have serious problems coping with the change. It's called "sudden wealth syndrome," say wealth counselors Stephen Goldbart and Joan DiFuria of the Money, Meaning & Choices Institute in Kentfield, California, and authors of Affluence Intelligence.
"For some people, sudden wealth changes nothing," DiFuria says. "The opposite extreme is people who actually commit suicide. The money is just one more overload they can't deal with."
"The impact of money on people, whether they gain a lot of it or lose a lot of it, is powerful," Goldbart says. "The less prepared an individual is for a sudden liquidity event, the more impact it's going to have."
After its IPO, Google invited six wealth managers to make in-house presentations to their newly wealthy employees. Similar actions to help employees deal with sudden wealth are rarely carried out by other companies, Goldbart and DiFuria say.
That's with good reason, says Larry Schumer, a principal in compensation solutions in Buck Consultants' Boston office. "That's a privacy thing," he says. "Employees do what they want with their money. The HR department might offer some financial counseling, but they're not going to get involved with the wealth that people have."
A greater issue, Schumer says, is retaining employees once they've gained wealth. Brett Harsen, a vice president of Radford, a San Jose, California-based consulting firm for technology and life sciences human resources, agrees.
"When we're talking about employee retention and engagement, we all know that it's not just about compensation," he says. "There's also the opportunity to work on interesting projects and the opportunity to advance in the organization."
Harsen says the sudden growth of a company after it has gone public, coupled with a possible lapse in communication from management to employees, may leave some workers feeling confused and uncertain about their future with the company. No matter how wealthy an employee has suddenly become, he or she still needs a clearly defined road map for advancement.
"Make sure employees believe they have a career progression at the company once" the company is public, he advises. "Provide management training, career paths, put systems into place and tell employees how to move up the ladder. It's those kinds of questions that are sometimes left until after the IPO event because everyone's focused on making this a successful offering."
But if those job-related issues are neglected in favor of a money focus, he says, "It really is difficult to keep people in their seats. They don't know what the future holds."
Now that Groupon's gone public, Chicago-area Realtors may be champing at the bit. In California's Silicon Valley, experience has shown that after an IPO, luxury homes are in high demand. After all, the newly rich have to invest their money somewhere.
Susan Hauser is a freelance writer based in Portland, Oregon. To comment, email email@example.com.