by Scott Thurm and Suein L. Hwang
How do you run a new economy company with a falling stock
Until now, that's been largely an academic question. Internet
companies of all stripes have used buoyant stock -- and the
prospect of even bigger payoffs -- to recruit employees, make
acquisitions, even pay lawyers, landlords and electricians.
Now, wildly gyrating share prices are putting this business
model to the test. As the prospect of a stock market in free fall
becomes all too real, Internet darlings are finding they have to
pay employees more, treat them better, grovel for support
services and, most of all, lay out a convincing path toward
In short: Falling stock prices change everything for the
industry that was supposed to change everything. Now, says Jon
Holman, who runs an executive-search firm in San Francisco,
"the dotcom companies will have to start doing all of the
things other companies on the planet do."
For starters, that means attracting and keeping talent with
lures other than surefire stock-option gains -- a task made
particularly hard for Web retailers by the recent fall from grace.
To snare Chief Executive Frank Newman, for example, San Francisco
online pharmacy More.com
Inc. offered a $500,000 salary, a guaranteed bonus of $250,000,
a $500,000 relocation package, as well as a $1 million signing
bonus in restricted stock and stock options valued at 5 percent
of the company.
Business-to-business Internet companies, until recently
considered hot properties, are fighting recruiting wars as well.
Lu Cordova, chief executive of Acteva Inc., a San Francisco-based Internet
"marketplace" for event organizers, says a recent
candidate for chief financial officer demanded a $350,000 salary,
plus "huge" stock options. Cordova demurred.
Plunging stock values are making it harder for Internet
companies to retain employees too. Silicon Valley workers often
monitor the company stock price obsessively and are quick to flee
when share prices stagnate or fall.
"People are very focused on the upside of the stock, on
quick wins," says Janice Roberts, senior vice president of 3Com
Corp., a maker of computer-networking equipment that struggled to
recruit and retain employees after its stock lost half its value
early last year.
At Nextcard Inc., a San Francisco issuer of credit cards over
the Internet, officials have turned weekly Friday lunches into
morale-boosting sessions. Nextcard shares, which hit a high of $44
last June, were at $14.375 in 4 p.m. Nasdaq Stock Market trading
Wednesday. "We're saying, 'Hey, this is an absolutely
exciting time for us as a business, and we need to separate the
market's gyrations from the great success we're having every
quarter,'" explains Dan Springer, the company's chief
Some companies may consider reissuing stock options at a lower
price. The strategy can help keep employees, but it also can hurt
earnings and anger investors. "It's not fun and not easy to
reset your option strike price," says Marc Bruneau,
president of the consulting firm Renaissance Strategy Worldwide
Inc., in Boston.
Good for venture capitalists
Falling stock prices are also making it nearly impossible for
prospective Web retailers to obtain start-up money. When they do
cut deals, start-ups will find themselves calling far fewer shots
than has been typical in recent years.
This is a welcome change for venture capitalists such as Tom
Dyal, a partner at Redpoint Ventures, Menlo Park. Calif. After
the most recent market sell-off, Dyal said: "As long as this
debacle doesn't continue, it's probably the best outcome for the
[venture capital] business."
In other sectors, late-stage financing deals and initial
public offerings will be delayed, scaled down or canceled. "People
who need to do financing in a short time period will find
themselves in a real tough squeeze," says Nextcard's
Companies also could find it harder to grow by acquisition as
their stock becomes a less-compelling currency for purchases. New-economy
paragons such as Healtheon and fiber-optic component maker JDS
Uniphase Corp. have been aggressive acquirers, courting
companies, as they do employees, with the prospect of rising
Still, JDS CEO Kevin Kalkhoven says stock swings won't deter
acquisitions, since, prices for targets are likely to rise and
fall in tandem with JDS's own shares. "We did deals when our
stock price was half of today's, and we'll do deals when our
stock price is twice what it is today," says Kalkhoven, who
announced a US$750 million acquisition on Tuesday.
Internet companies will find support services harder to come
by. Melody Haller, president of the Antenna Group Inc., a San
Francisco public-relations firm, stopped taking on new Internet-retailing
clients six months ago. "The game is done there," she
says, arguing that some prospective clients have less of a
business plan than a "delusion" of success.
Even when support is available, it's likely to be more
expensive. Lawyers, ad agencies, PR firms and headhunters have
accepted -- in some cases demanded -- stock as payment for their
services in recent years. Holman, the recruiter, says he will
still take stock in start-ups but will demand more shares -- or
An Internet shakeout will affect these supporting industries
as well. Internet companies spent $3 billion on advertising last
year, to uncertain effect, and many companies are now cutting
back. In particular, newcomers formed to take advantage of the
Internet boom may suffer.
Ann Grimes, Wall Street Journal, contributed to this