[Tech Talk] Million-Dollar Salary Developers... Why They Suddenly Became Algeoji (Broke)

Startup Practice of Adding Stock Compensation
Stock Prices Plummet in Recession...Assets Also 'Evaporate'
VCs with 40-70% Reduced Investment Amounts Face Serious Issues

IT development positions at Silicon Valley companies in the United States have long been considered one of the "dream jobs" both domestically and internationally. This is due to flexible work cultures, employee benefits, and high salaries. In particular, developers at so-called "big tech" companies often earned annual salaries in the hundreds of thousands of dollars.

However, many workers at big tech companies have recently experienced severe financial hardship. Although there is a global recession, why have workers who once earned high salaries suddenly fallen into poverty overnight?

Multi-million-dollar salaries vanish like melting snow as stock prices plummet

Google Headquarters in California, USA
Photo by Yonhap News

On the 7th (local time), the US financial media outlet Wall Street Journal (WSJ) focused on the financial difficulties faced by employees of the US big tech company Google. Tommy York, a former Google developer living in San Francisco, California, said he has yet to save enough money to buy a house.

It is not that his salary is insufficient. Over four years, he received an annual salary of more than $175,000 (approximately 232.4 million KRW) from Google. When Google conducted layoffs in January, he also received an additional severance payment of $46,000 (about 61 million KRW). Yet, he is still struggling with poverty.

The WSJ pointed to the salary structure of tech companies as the reason for the proliferation of "high-salary poverty" cases like York's. Tech startups pay employees a base salary plus "compensation," which mainly consists of company stock, i.e., stock options.

This method allows startups to offer employees amounts that are high relative to the company’s size, thereby attracting more talented individuals. The practice of compensation through stock options is still widely used by US startups that have grown into large corporations today.

For example, according to the US tech company salary data website Levels.fyi, senior developers in the US often earn annual salaries exceeding $300,000 to $400,000, but about 50% of the total compensation is actually stock options.

The problem arose last year when inflation and interest rate hikes caused the stock market to freeze, leading to a crash in tech company stocks. As a result, the value of the stocks tech workers received was also downgraded.

For workers who considered the stocks they had received as their "assets," it was as if their wealth suddenly melted away like snow. If they had taken out loans secured by these assets to cover living expenses, they could instantly fall into poverty.

Stock compensation was the secret to startup growth... but a double-edged sword in a recession

The venture industry has been experiencing financial difficulties since the first half of 2022. The photo shows Silicon Valley Bank in the United States. [Image source=Yonhap News]

Such cases are not unfamiliar in the domestic tech industry either. KakaoBank, which went public in 2021, recorded a market capitalization of 33 trillion KRW on its IPO day, becoming a leading financial stock in Korea. The stock price exceeded 90,000 KRW, and employees received an average of about 320 million KRW each through stock options.

However, KakaoBank’s stock price crashed to the 20,000 KRW range about a year after reaching its peak. Employees who failed to realize profits in advance had to endure the evaporation of their assets.

Those truly facing a crisis now are likely employees of private venture companies rather than publicly listed firms. As mentioned earlier, tech companies actively use stock compensation to secure talent, and this strategy is also prevalent in venture companies.

Moreover, stock option compensation in private companies is important because it instills a sense of ownership in each employee. In Korea, the first stock option system was implemented in 1998 to promote venture companies, and it remains a key strategy for attracting core talent in startups.

The venture boom triggered by the non-face-to-face and digitalization trends during the COVID-19 pandemic gave rise to numerous unicorns (startups valued at over $1 billion), and employees who received stocks suddenly became wealthy.

However, even for private companies, corporate value can be adjusted through separate evaluations. Investors may devalue the stocks they hold, or companies may reduce their own value to cut operating costs.

In some respects, this is riskier than publicly traded companies whose stocks are traded on open markets. According to venture capital (VC) investment flow research firms such as Dealroom and KPMG, VC investment amounts in most countries shrank by 40-70% in the first quarter of this year. Startups that have run out of funding have the most viable option of lowering their corporate value to attract new investments.