As I look around at the industry right now, I can see many signs of a potential economic downturn. Investors are increasingly risk-averse rather than risk-seeking, there is talk of hyper-inflation, and a lot of negativity as a result of supply chain issues.
In my experience as the CEO of Papaya, a fast-growing unicorn company, I’ve learned that you can’t put your head in the sand and ignore these signals. You need to be continually adapting, thinking two steps ahead, and making smart and strategic decisions early in the game so that you’re not caught out falling back on knee-jerk reactions.
Here are some of my guiding principles during times of uncertainty, to help other CEOs to lead effectively through a recession.
Keep Your Eye on Your Burn Rate
No one wants to think about it, but imagine that your business was in a loss-making situation. Now consider, how many months would your cash resources hold out? You want this number to be as large as possible, and that could mean making some tough decisions. According to Forbes, under 6 months is a critical situation, while in an ideal scenario, you might have as much as 18 months of cash runway to work with.
There are many non-mandatory policies that organizations can adapt that can make a real difference to burn rate. For example, take some time to deep-dive into your policy for Paid Time Off (PTO). Instead of allowing employees to carry over unused vacation days, shift to a “use it or lose it” policy. In my experience, this can slow down the burn by as much as two months. If this isn’t enough, consider cutting PTO company-wide, ensuring that you’re keeping to legal PTO requirements in each location of course. If your company employs 500 workers, reducing PTO by just 2 days for all employees can save half a million dollars each year.
Outside of PTO, there are many other soft HR benefits that have become common practice which you might need to pull back on temporarily while you focus on extending your runway. Think about welcome gifts, weekly happy hours or expensive parties to celebrate milestones. Especially if you’re cutting benefits, employees are likely to understand that it makes sense to put these bonuses on pause, too.
Don’t forget to look towards your clients and manage billing with an iron fist. Now is not the time to be letting customers slide on overdue subscriptions. It’s a fact that during an economic downturn you will lose some clients, and the last thing you need is bad debt eating away at your burn rate.
If the numbers don’t add up, don’t be afraid to speak to the bank about opening a line of credit. You don’t have to use it, but it can take a few months to get it organized, so it’s far better to be prepared ahead of time.
Consider Your (Stock) Options
Employee morale is an important consideration, and you definitely want to foster a feeling of “we’re all in this together.” While steps such as cutting PTO could lead to employee frustration, show that you’re working to support employees by making sure they aren’t negatively impacted by a drop in share price.
Extend the exercise period: Allow employees to hold onto their stocks for longer than the standard 90-day period. This could allow leavers to hold onto “underwater” stocks which have dropped in value for longer. Remember, this could reduce the tax incentives for the employee, and certainly comes with some administrative overheads for your company.
Convert stock options to RSUs: Restricted Stock Units come with a fixed price, which can alleviate the uncertainty and frustration for employees of watching stocks drop in value. By offering RSUs in exchange for shares, you’re also freeing up shares to give away in the future.
Offer a cash or share-based appeasement: If you feel confident in your finances, you may want to give employees a bonus of some kind to make up for the shortfall. This can certainly positively impact morale, and the administrative burden will be low, but be prepared – it will come at a hit to the business.
Communicate everything to your team
We are in a time of great uncertainty, and I feel confident that the tech industry will bounce back stronger than ever. But if a recession does impact your business in the meantime, you’ll want everyone on your side. That means customers, employees, executives, and the board of directors, too. You’re a team, and that means acting like one from the start. Be transparent about the situation, as I’ve seen that evasiveness and secrecy can cause rumors and bad feeling.
If you have to think about terminations and redundancies, liaise with HR about your legal obligations in each country in terms of severance pay and notice periods, and then be honest with the rest of your staff about how the reorg or the losses might impact their day to day work. If you’re still looking to implement global expansion plans, ask for advice on where smart landing places might be for the business, and where government incentive plans could ease the transition.
Remember, no CEO is an island. You can’t make it through a tough time alone. Your team needs to be invested in your vision and working closely by your side.