Share prices of cannabis companies might be in the tank, but granting stock options or shares remains a significant way for both private and public organizations to try to lure talent.
The main difference this year versus the same period in 2019, however, is that potential employees are far more cautious when it comes to any such incentives.
“When capital markets are hot, stock options are very attractive. They have a retentive value to them, because people don’t want to walk away from the upside of those options,” said Alison McMahon, founder and CEO of Cannabis At Work in Edmonton, Alberta. “However, when the market shifts—and this is exactly what we’re going through now—those options no longer have the value they once did. They lose their retentive value.”
Some companies offer such packages only to executives, while others do it throughout the organization. Denver cannabis recruitment agency Vangst, for its part, offers options to employees even at entry level.
“The way I see it: You treat things better if you are an owner rather than a renter,” said Karson Humiston, CEO of Vangst.
Open to All?
Corporate governance in the cannabis industry remains generally weak. And when executives issue themselves either shares or options, directors are generally unable to block such grants, said Danny Moses, adviser at New York-based cannabis investment group Merida Capital Partners.
Another misstep by some companies offering options is to set the strike price too low, argues Craig Behnke, equities analyst at Marijuana Business Daily’s Investor Intelligence subscription service.
Doing this when the price to exercise such an option is equal to or lower than the current share price of the company offers little incentive for an employee to hang on to that option.
In that situation, staffers typically want to cash out rather than work to improve the company with the hope of reaching a higher stock price.
This, in turn, dilutes the share base, lessening the value of an individual employee’s shares overall.
“That can become quite dilutive over time,” he added.
One recent example of such possible dilution was the decision by top executives at Arizona-based multistate operator Harvest Health & Recreation executives to surrender a total of 2.4 million of their individual stock options to employees.
“Our employees are some of the hardest working in the industry, and this award is meant to recognize both the accomplishments of the past year and the expected commitment to achieving profitability ahead,” Harvest CEO Steve White said in a news release.
While an altruistic and positive move on the surface, the strike price of the surrendered options was set at the company’s then-current market price
of around $2.85 a share versus the original strike price of $6.79 per share for the executives.
“We like to see companies use stock options as a component of employee compensation to better align shareholder and employee interests,” Behnke argued. “We prefer to see the options granted with a strike price significantly higher than the current stock price. That structure can provide strong incentive for employees to create long-term shareholder value.”
Poorly handled or not, options remain a key way for companies to get talented people through the door. Such businesses just have to adapt to the new realities, Vangst’s Humiston said.
“We encourage companies to be honest about this because it sets a relationship up better with candidates,” she said. “We have seen some companies getting into legal trouble when they have overpromised.”