At the writing of this article #howcould2020getworse was trending. The hashtag corrals discordant sentiments of irony, nihilism, and cabin fever in ways that might be expected. This is, perhaps, because really the only thing you can expect in 2020 is to be caught off guard.
And no one hates to be caught off guard more than a VC.
On a normal day, investors combat uncertainty like it’s their job (it is). Hours are spent refining systems that keep investments profitable: scrupulous tracking, informed forecasting, compliant reporting, kindly drop-ins to ensure seed stage companies aren’t whiteboarding their funding away, etc. For your average VC, the status quo conjures the image of spinning plates — each desperately balancing above an unseeable line.
With the impact of Covid-19 reverberating across every industry in every continent, there’s more than ever for investors to manage. We sat down (well, you know what we mean) with professionals at Certent, the world’s leading equity management platform, to discuss what their clients need to know most in Q2. Here’s what we found:
1. If there’s any question about who owns what, now is the time to button things up.
When it comes to forecasting, the light at the end of the tunnel is temporarily turned off. On the first day of Q2, nearly 300 public companies had withdrawn guidance from their investors with more likely to follow suit: the private markets are likely no different. With less broad-based visibility and communication, it’s the right time to make sure you have purview over your own standing.
Professionals at Certent recommend business owners ask themselves whether their tracking for equity across investors and employees is up to snuff. Having the most accurate picture of funds will allow leaders to make tough, money-saving decisions.
Amidst chaos, cap table management is a task often left undone. And yet, it’s consequential. It’s like dusting your bookshelves. Q2 is the right time to get your house in order, perhaps by allowing a third party cap management service take the responsibility off your hands. By understanding where founders and investors are today, your next term sheet may better align with the organization’s, and investors’, strategic objectives, helping ensure long-term success.
Distressing times often provide opportunity to those who have a vision for a way out of it.
“This is the greatest financial crisis any of us have ever faced, probably the greatest since the Great Depression,” explains Jack McCullough, President & Founder of the CFO Leadership Council. “And, yet it presents opportunities for those willing to seize them. Executives with the vision to understand the new reality and the boldness to reimagine their business models can ensure that their companies emerge from the crisis stronger than ever. First survive, then thrive.”
2. More people will be let go. Plan for the consequences.
Layoffs and furloughs are ripping through most industries, and the wave is unlikely to temper in Q2. For many businesses, this type of restructuring is new territory. Leaders will have to consider whether they are permanently downsizing, furloughing employees, or finding a part-time arrangement in between. At nearly every level, compensation may need to be reevaluated. Should CEOs get onboard with others and cut their own compensation? According to Semler Brossy, there has been a 67% reduction in CEO salaries since March.
Any change in employment status can affect equity standing — and any change in equity standing can affect the entire schema of a company’s reporting. Leaders will need to consider how revisions to their payment structure, especially at the executive level, impact the broader cap table. As always, investors should be made aware of dramatic changes and may also be able to offer valuable insights from across their portfolios.
Additionally, leaders will need to understand exactly how furloughs affect their employees’ benefits. Especially during a health emergency, withholding a full-time employee’s group healthcare could result in ACA penalties. Especially if employees also have additional benefits like retirement or equity, companies must be ultra scrupulous with their SEC reporting. Companies that have not dealt with this type of restructuring before will find it helpful to off-board these responsibilities to a third party.
3. Business is different behind a screen, but it’s starting to become the standard.
For many, the old routines of the office are starting to feel like distant nostalgia — difficult to replicate, and at times, remember. Someone even made an app that makes office noises.
VCs especially are finding it challenging to keep pace with their previous investments, and not just because of the economic slowdown. The work is there; rather, the systems to do the work are different and require new processes. Take the evaluation of a new venture, for example. Many VCs find on-the-ground meetings most helpful in seeing exactly where their money is headed. A work-from-home culture thwarts such access.
How do you pitch a business at this time, anyway? What if your business is primarily brick-and-mortar? Many VCs are using this time to look for nimble, digitally-prepared companies. If you’re a company seeking investment, proof that you are capable of being remote could go a long way. This extends not only to your product or service, but also to your HR management, financial reporting, and equity reporting.
4. Not every business is suffering. People are buying a lot of peanut butter.
Not to shoehorn a silver lining, but the fact of the matter is some businesses are benefiting from the effects of social distancing. In March, Smuckers announced unprecedented demand for peanut butter, amongst increased demand for coffee. Cleaning products, remote working systems, and pharmaceuticals have also seen boosts in demand and stock value.
For VCs, the primary consideration here is to pay as much attention to what is working in your portfolio as what is not. Companies taking on more capital in this time will need to be diligent with their reporting and communicate clearly with pre-existing shareholders. As businesses grow in this odd time, leaders may need to revisit their inventory management plans. Don’t allow a high ROI to become lost across a mismanaged cap table.
5. The bailout continues. Don’t miss the train.
The trillions of dollars meant to jump-start the economy are starting to come in the mail to citizens and businesses alike. As compensation is re-compensated by the government, leaders will need to evaluate how their equity management is affected, and communicate their financial standings to investors.
The Paycheck Protection Program (PPP) is up and running for small businesses with fewer than 500 employees, and at the writing of this article, more funding has been made available. Already, however, the infrastructure behind the payout is causing headaches and frustrations — especially the primary nuance that banks are tending to only lend to companies with whom they have a pre-existing relationship. A lot of the slowdown is due to regulatory restrictions implemented after the 2008 crash. Basically there’s more red tape, and in many ways that’s a good thing, but it has also caused stalling.
Additionally, big businesses, perhaps too big of businesses, receiving funding that they’ve been asked to return. Generally speaking, VCs should be well aware of how the bailout money can help companies in which they’ve invested and how to best apply it. Never before
All in all, Q2 will be much like the end of Q1 in presenting a radically new landscape of business. However, as new practices and adaptations become routine, business leaders and VCs alike may find Q2 of 2020 to be the perfect time to do some spring cleaning. Businesses that stay in tight communication with their shareholders, that collaborate with effective third party help, and that find new ways to save money may come out of all this better than ever.
To learn more about the equity management solutions offered by Certent, visit go.certent.com/certentprivatemarkets.