Elon Musk recently made headlines when he announced his desire to take Tesla private. Most companies are excited to become publicly listed - the news when a company wants to go private is a bit more unusual. The announcement (which has recently been updated to confirm that Tesla will remain a publicly traded company) reminded me that we think a lot about what happens when a company goes public - but not much attention is paid to what happens when a company goes private.
Shifting gears and going private is not an uncommon thing for publicly-traded companies. DELL’s CEO, Michael Dell, and Silver Lake Partners took DELL private for $24.4 billion in 2013 (although the company has recently announced that it’s going public again), Burger King went private after not one but two IPOs, and Hilton Worldwide Holdings was bought out and taken private by Blackstone Group for $26 billion. In fact, according to the Financial Times, the number of publicly listed companies decreased by 50% since 1996.
Going “private” has benefits but also new challenges. Here are the top five HR challenges to consider when public companies “de-list”.
1. Liquidity for employees will be more difficult and less frequent
When a company is publicly listed, employees have control over deciding when to exercise (and sell) their employee stock. They can do it in a manner that fits their lifestyle and with personal tax planning in mind.
Once a company goes private, shares can only be sold with Board approval or during a liquidity event sponsored by the company. Liquidity programs are generally not offered on a consistent basis and are provided at the convenience of the company, not the employees. Companies going private need to be sensitive about this changing dynamic and need to consider the availability (and timing) of liquidity, in order to maintain healthy relationships with employees.
2. Employee retention may become an issue
Going from public to private will change the relationship with the employees. The new dynamic may change the culture and some employees will not want to work for a company that has a different capitalization structure. Employees may begin to look around and see what other companies might offer in terms of equity and liquidity. Not only is this distracting, it can impact productivity.
An important consideration for management is to review the “public” stock plan design and eligibility requirements. In some cases, more employees may receive equity, which can be seen as a positive and send a strong message that being private has its advantages. Companies should not look at equity in a vacuum: they should review cash compensation, benefits, retirement plans, career opportunities and a reimagined company’s mission that will resonate with and motivate employees, in the absence of immediate liquidity.
3. ESPP: Keep it or leave it?
ESPP - or Employee Stock Purchase Plan - is generally offered to employees when companies go public, to enable eligible employees to purchase company shares at a discounted price. It is designed to increase employees’ sense of participation in the company’s affairs and motivate them to do their job in the best way possible.
When public companies go private, they face an important question of either shutting ESPP down - meaning that its benefits will go away - or keeping it. While keeping the plan might seem to be an obvious choice, if there is no liquidity, employees will not want to buy shares with their own money and the plan will become unpopular and obsolete. Hence, management should consider the availability of liquidity as the key factor when making this decision. There are private companies who offer successful ESPP programs, but additional design work is needed.
4. Major organizational changes will occur and jobs will be eliminated
Publicly-listed companies are supported by an army of legal, accounting, and finance jobs that make sure that the company is compliant with public listing requirements. As a public company goes private, these jobs may no longer be needed and job cuts will have to take place. Any time a company reduces their workforce, careful communications are called for.
5. Strategic focus for employees may change and timeframes will accelerate
When Elon Musk first spoke about taking Tesla private, he expressed his frustration with the demands of operating a public company, including the quarterly reports that incentivize shorter-term thinking. Going private creates an opportunity for the company to rethink its strategy (both long-term and short-term) and shift its focus towards longer-term goals vs. meeting investors’ expectations on a quarterly basis.
The tricky part, however, is that private companies borrow money from private investors who are likely to put pressure on management to perform in order to receive an aggressive return on their investment. This may accelerate the timeframes within which employees are expected to deliver the results and change the dynamics and focus of the company.
Taking a company public and vice-versa is not an easy decision. It requires management to be laser-focused on the company’s objectives and understand the benefits and business implications of these changes. Taking the time to understand the changes necessary to employee programs will be vital to achieving short-term and long-term objectives and success.
About the author
Carine Schneider was a Partner at Nua Group. Carine was named one of the 100 Influential Women in Silicon Valley by the Silicon Valley Business Journal and one of 17 Women to Watch in 2017 by Brown Brothers Harriman Center on Women and Wealth. She is the founder of Global Equity Organization where she served as Chair of the Board for 18 years and is now Chair Emeritus.