Stripe is lining up a massive $6bn (€5.6bn) investment round, among the biggest in Irish corporate history and huge even by the standards of Silicon Valley, the Collison brothers’ home-from-home.
But the market doesn’t like the deal, with good reason, that’s because everything about the process looks like the Limerick brothers are still fighting a war for tech talent in a market where money is what’s becoming scarce – and therefore valuable.
The details are complicated but Stripe’s early growth was fuelled in part by hiring sought-after recruits on a promise they’d share in the company’s global growth using what are called restrictive share units (RSU).
That’s common among technology startups which typically set aside in the region of 10pc-20pc of the company for employees in the event of a stock market listing within a set time scale or other pre-agreed criteria.
What is not common is for an employer to honour the spirit of the RSU if the original criteria are not met.
Stripe’s RSUs will start to expire next year with very little prospect of a stock market listing happening.
All things being equal the RSUs simply expire, quashing the prospect of early hires becoming tech millionaires.
But that is not Stripe’s plan. The huge sum of money it is looking to raise will be used to smooth the delivery of wealth to Stripe employees.
Generals fighting the last war
It can do that by allowing the stock to vest even though the shares have yet to float. The twist is that as new owners of real shares rather than potential stock, the beneficiaries of the company largesse will face big tax bills. That’s where Stripe really steps in. It has gone to the market to raise capital in order to help meet those tax bills and to create a market to buy stock back from employees who want to cash out some or all of their new wealth.
But it’s pretty clear the markets are in a bad place in terms of funding tech in general and don’t seem to much like what’s on offer in Stripe’s case anyway.
Investors like investing in businesses that need their capital for growth, whether its by acquisitions or expansion into new markets or products.
Needing capital to honour years old staff commitments is less compelling.
How do we know the market doesn’t like the deal? The longer talks with investment banks and investors have gone on, the lower Stripe’s valuation.
All of which begs the question, why are Patrick and John Collison, the famously smart operators who built a multinational payments business from the ground up, ploughing on?
The underlying answer seems to be the classic error of generals fighting the last war.
The coming $6bn equity sale is a big bazooka in the battle for talent.
That war has dominated the thinking and agendas of founders and executives in Silicon Valley and to a lesser extent cities like London, Berlin and Dublin for the past decade.
During the same period founders have been able to take the availability of capital on the other hand as almost a given as money has flooded into the startups and venture capital eco-systems during the age of low rates and high expectations.
That flood is drying up. The crisis gripping the venture sector’s favourite Silicon Valley Bank this week is a case in point.
Stripe has the underlying strength to buck the trend, but only so far. Its scale and growth potential means it can keep fighting for talent even in a bad market by raising capital outside the traditional IPO route. But at a cost.
Equity funding doesn’t drain corporate coffers day-to-day but giving away a share of your own future is the most expensive way to grow a business.
And it is not clear why it should. Stripe cut its workforce by 14pc last year and new hiring has slowed. Its peers and rivals are doing the same, growing the pool of potential new hires and putting downward pressure on pay and other rewards, like RSUs.
The scarcity value of tech skills is at a decade low right now
The scarcity value of tech skills is at a decade low right now.
If the premium on skills is falling, the premium on capital is rising. That’s why Stripe’s valuation dropped from $95bn in 2021 to around $55bn at the start of this year, certainly not because it had become a worse business.
A decade of free money in the wake of the financial crisis has come to an abrupt end as inflation and interest rates have surged. At the same time, demand – and competition – for capital is rising thanks to the hefty financing needs of the green transition in the US and Europe.
The lesson for every technology business is that money is now the resource with the greatest scarcity value.