Startup employees are saying no thanks to their equity.
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 monthly 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.
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.
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 before times of 2019, employees were exercising about 43% of their in-the-money options. In Dec 2023, they exercised only 31% of the same.
So what's behind the negativity?
- 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.
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 and we will see it improve as valuations / fundraising finds better footing in 2024.
But no denying equity comp has lost some luster for many in startups.
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#equity #stockoptions #startupemployees #compensation #startups
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