After discussing the IPO environment last newsletter, it’s time to switch gears a bit and check in on the state of employee equity. Carta continues to release great data, and for this intro, we will be doing analysis on the state of startup compensation as of year end 2023.

Summary - What do the numbers say?

There are a few key things to point out in this article. First, employee headcount at startups decreased in 2023 across the board. The decline stems from a combination of continued elevated employee departures and layoffs, combined with new-hires being cut in half.

However, while overall headcounts have declined, equity packages have stayed flat year over year, though still notably depressed from 2021 levels.

Finally, what did all of this mean for exercise rates? After trending lower since November 2021, we saw a slight uptick in exercise rates in January 2024. That being said, startup employees are still exercising at lower rates than January 2023.

What does all this mean?

All of this ultimately goes back to the Fed and how expensive cash is right now. Higher interest rates mean that startups are going to have to work harder for capital, and in turn, they will need to find ways to “trim the fat”. With payroll typically being the highest cost for employers, it would make sense for these companies to try to become more efficient with their hiring and doing more with less.

We are operating in a market where exits and liquidity are hard to come by. Thus, employee equity is not being regarded as highly as it was a couple years ago. It is possible that new employees are not negotiating as hard on their equity compensation packages. On top of that, option holders are letting their equity expire due to drops in valuation and a difficult IPO market. As we move further into 2024, if the IPO pipeline continues to flow, we should see an uptick in both employee interest in equity compensation and exercise rates. If your friends are cashing in on IPOs in the news, you're more likely to care about your own equity package.

Why this matters: Salary is important, but for a startup, equity appreciation can end up being the most lucrative aspect of a compensation package (if the company does well). For employees looking to move jobs soon, there are two important considerations that need to be made.

1. Does it make sense to exercise my current company’s stock options, and if so, how will I pay for it?

2. If I’m moving to another startup, what percentage of my salary am I willing to negotiate in exchange for more company equity?

Becoming more knowledgeable about your compensation package is one of the easiest things you can do to ensure that you are being fully compensated for your work.

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