Ah 2020 and 2021, the good ole days. When you could wake up, drop a couple hundred bucks on a meme coin or junk NFT and flip it for 100% profit the next day. Life was good.

While not as extreme, for tech workers, you could basically throw a dart at any tech start up and there was a decent chance they'd IPO. In turn, confidence in option exercise was high. However, as the party ended and it became clear that not every tech worker would become a millionaire, sentiment on option packages and exercising your options dimmed as well.

As seen in the graph below from Carta’s H1 2024 State of Startup Compensation, employees are more focused on their salary packages than their equity. Salaries have remained relatively stable over the past two years, while equity packages have seen a decline of 36%. With high inflationary pressures and stall in exit activity over the past couple of years, employees are likely putting more emphasis on money in the bank than a riskier benefit like equity.

Additionally, for that equity that has been granted, employees aren’t spending their funds to exercise, thus allowing their options to expire. As the graph below points out, option exercise rates are at some of the lowest levels they have been in quite some time, having dropped from a high of 54.7% in 2021 to a low of 32.8% in the second quarter of 2024.

Why this matters: It’s unsurprising employees are bearish on option packages in 2024 given the state of startup equity. However, with the VC landscape expected to see some positive tailwinds in the near future with the Fed lowering interest rates and a robust pipeline of late stage companies expecting to IPO, employees may begin to feel more confident in their option packages as people start making some serious money from their equity again. Until then, the wait for the next party continues…

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