Two Thirds of Startup Employees Do Not Exercise Their Equity

2/3rds of startup US employees are not exercising their equity... and I think it's mostly the right choice.

A little context:

In order to become real company stock, startup equity has to jump two hurdles. First, it has to vest - meaning the employee has to remain at the company for a specific amount of time.

Second, it has to be exercised, or purchased by the employee.

The chart below shows the exercise rate for vested options since 2019 across US employees whose companies use Carta. We split the exercise rate into three separate lines to reflect the "status" of the option when it expired. Most stock options have a 10-year expiration window—but that gets cut short if the employee leaves the company, either by choice or through layoff.

So you can think of this chart as showing "what percent of employees exercise their options when they leave".

𝗜𝗻-𝗧𝗵𝗲-𝗠𝗼𝗻𝗲𝘆: options where the strike price at expiration is higher than when it was issued.

𝗔𝘁-𝗧𝗵𝗲 𝗠𝗼𝗻𝗲𝘆: options where the strike price at expiration and issuance was identical.

𝗨𝗻𝗱𝗲𝗿𝘄𝗮𝘁𝗲𝗿: options where the strike price at expiration is below the strike at issuance.

In the before times of 2019, employees were exercising about 43% of their in-the-money options. In 2024, that number is down to 33%.

𝗦𝗼 𝘄𝗵𝗮𝘁'𝘀 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴?

• Valuation declines: startup employees are well aware that many startups were overvalued in 2021 and are now probably not worth the sticker price

• Layoffs: Most employees have 90 days from the moment they are terminated to exercise their vested options. Would you pay upfront for stock in a company that just let you go?

• Cost of capital: interest rates have risen, employees may feel more reluctant to pay upfront for an uncertain return in this macro economic environment.

Kinda strange to see the underwater exercise rate be so close to the other two rates. Maybe this is a reflection of poor employee education around equity or perhaps it's another factor I'm missing.

All in all - not great. Some portion of the promise of startups is wrapped up in employee equity. I do think this exercise rate is a lagging indicator, but there's no denying equity comp has lost some luster for many in startups.

#startups #startupequity #startupemployee #compensation #equity

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