Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Technology start-ups have slashed equity packages for new hires as they weather a prolonged downturn, according to new data from San Francisco-based software company Carta.
People going to work at start-ups are receiving 37 per cent less equity in their companies on average compared with 18 months ago, the figures showed. Average salaries have barely changed during that time, shrinking by 0.2 per cent since November 2022, according to Carta, which mines information from the 43,000 early-stage US tech groups that use its platform to manage their investors.
Equity packages that grant new employees shares in their company have long been a crucial element of start-up compensation and a means by which fledgling companies can still attract top talent even if salaries are lower than at bigger rivals.
People who join start-ups, particularly in their early days, can become wealthy by selling those shares when the company carries out an initial public offering. Facebook’s 2012 IPO created “a new generation of young millionaires” among its 3,000 employees, the FT reported at the time.
But there has been a broad decline in the valuations of such groups in the past 18 months as publicly traded technology stocks have whipsawed and high interest rates have pushed investors towards less risky investments.
“Companies are being very conservative in how they think about managing both cash and equity in an uncertain market,” said Tom Keiser, chief operating officer of Carta.
He said start-ups were holding back shares to help raise more funds once market conditions improved, but added that workers had also contributed to the shift in compensation.
“Another part of it is that employees no longer believe in trading hours or compensation for equity because they do not believe the market is there the way it was before to generate wealth,” he said. “HR departments are looking at what employees really value and they value cash more right now than they do equity.”
Around 20 per cent of investments in start-ups tracked by Carta last year were “down rounds”, meaning the financing was at a lower valuation than the last time the company raised funds — the highest rate of down rounds since early 2018. A drop in valuation means the shares held by start-up employees are less valuable than before, even for those who received a larger slice of the pie.
Start-up equity packages have shrunk even as headcount has fallen on average, according to Carta. Last year marked the first annual net contraction in start-up employment in at least five years, with more total job departures than new hires.
Their hiring halved in 2023 compared to a year earlier, and employee churn was considerable — 32 per cent of workers hired in 2022 have already left, according to the Carta data. There was a wave of lay-offs among start-ups early last year, including 18,000 employees who were cut in January 2023 alone, which mirrored swingeing lay-offs by Big Tech groups that month.
Existing employees at start-ups have watched the value of their shares decline sharply on paper over the past two years. An IPO or share sale on private markets allows workers to cash out their holdings. In a string of recent deals, however, workers have sold stock at a much lower valuation than previously hoped.
Grocery delivery app Instacart was valued at $9.9bn when it listed on public markets in September, a fraction of the $39bn it was worth in 2021. When social media firm Reddit launches its IPO next week, its shares are expected to be valued between $5.8bn and $6.4bn, less than the $10bn Reddit reached in its last private valuation.
Some start-ups that have delayed IPO plans during the downturn have carried out private share sales in recent months to provide some liquidity to workers whose wealth is tied up in company stock options. Earlier this month, payments group Stripe organised a sale of around $1bn of employee shares in a deal that valued the company at $65bn, below its peak value of $95bn in 2021.
As valuations have fallen, some start-ups have rushed to reprice employees’ stock options, lowering the price of the grants in order to increase the financial upside for the employees who hold them. The past six quarters have been the busiest period for repricing share options since the start of 2019, according to Carta.
