New attitudes toward equity are changing the compensation equation

New attitudes toward equity are changing the compensation equation

Author: Kevin Dowd
Read time:  4 minutes
Published date:  25 April 2024
In a new-look venture climate, stock options and other types of company equity might be losing some of their luster in the eyes of employees.

Richard de Silva is a firm believer in the power of company equity to ensure employees, management, and investors are all aligned and incentivized to perform their best. For years, he’s been backing up that belief with action.

De Silva is the founder and managing partner at Lateral Investment Management, a private equity firm that invests in middle-market businesses. Many of Lateral’s targets are founder-led companies that were previously bootstrapped. Most of them do not have existing employee equity plans in place. So, as part of their investment, de Silva and Lateral work with their new portfolio companies to implement equity plans that give employees the chance to own a stake in their employers. 

“We work with the founder to push equity down to everybody in the company, to create alignment,” de Silva says. “And it’s usually in places that are outside of Silicon Valley, where the concept of that kind of broad-based ownership is not necessarily expected. But it really does help to strengthen a company culture.” 

New attitudes toward equity

In recent history, equity has been a very effective carrot for companies seeking to attract and retain talented employees. Owning equity brings a financial upside that salary alone does not. During most of the 2010s and the early 2020s, when startup and tech valuations seemed to be in a state of non-stop ascendence, that upside was particularly appealing. 

Lately, however, de Silva and other industry leaders have noticed a shift. As tech valuations have undergone a reset over the past two years, employees have also reset their expectations about company equity. Equity is still an important piece of the compensation puzzle. But these days, it’s a smaller piece than it used to be. 

From November 2022 to January 2024, average salaries for new hires on Carta mostly held steady. The average new equity package, meanwhile, got 37% smaller. 

Equity suffered larger impacts than salary from downturn

“In the past, equity was used as a recruiting and retention tool: ‘Come join us, you will be an owner, you have a stake in the company,” says Mai Ton, founder and CEO at EMP HR Consulting and the author of “Come Into My Office,” a book about her time as an HR leader at nine different tech startups. “And I think now, because of hard times in the uncertain economy, employees want cash, because they cannot bank on the promise of future equity.” 

Another sign of how employees are thinking about equity: From November 2021 to November 2023, the portion of vested, in-the-money stock options that employees chose to exercise declined from 58% all the way to 30%. Employees have been receiving less equity in recent months, and they’ve also been less likely to capitalize on the equity they already hold. 

Slight uptick in employee exercises to start 2024

Some of the new equity issued in 2023 may be very valuable in the future. But for now, it’s mostly theoretical. Given the state of the market, it might remain theoretical for longer than startup workers have grown to expect. Thus, de Silva says, many of those workers are placing a new emphasis on salary. 

“The recognition is there that equity is a long-term play,” de Silva says. “We’re probably back on a cycle of companies taking five to seven years to really build and scale their businesses, rather than a kind of bubble phenomenon where you have companies going to unicorn valuations in 12 months.”

‘Cash is what matters most’

In her work with EMP HR Consulting, Ton advises a range of tech companies on hiring and compensation structures. Last year’s numbers align with her experience: The math of startup compensation has changed. 

“Cash is what matters most again,” Ton says. 

The math has changed on both sides of the compensation equation. Employees are less interested in equity, Ton says, and companies have also grown more conservative in doling equity out. In some cases, startups are trying to preserve existing equity pools for longer than they’d originally planned as they seek to raise new funding and refresh those pools with more shares. 

“I think it is both supply and demand on this,” Ton says. “Supply isn’t as generous as it used to be, in that companies aren’t offering big numbers anymore. And on the employee side, employees may not value the potential of equity anymore."

Equity is down across all roles

The average size of newly issued equity packages has declined at every level of employment, from entry level up to the C-suite. But there are some significant differences in the scope of those declines. 

Equity benchmarks declined for every role in H2 2023

The gap is largest at the senior contributor and senior manager levels, both of which saw average equity packages decline by more than 25% from May 2023 to January 2024. More senior job levels, meanwhile, experienced much smaller changes. It’s clear that companies are not taking a uniform approach to reducing the size of equity packages. 

In de Silva’s eyes, this type of strategic thinking about how to issue equity to employees is exactly what companies should be doing in the current market. He says companies should make sure their compensation strategies are keeping pace with changing employee attitudes toward equity, in the short term and the long term. 

“I think it’s important to get the right alignment across every time frame,” de Silva says. “This is a real opportunity to be thoughtful about that.” 

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Kevin Dowd
Author: Kevin Dowd
Kevin Dowd is a senior writer covering the private markets. Prior to joining Carta, he reported on venture capital and private equity at Forbes, where he wrote the Deal Flow newsletter, and at PitchBook, where he wrote The Weekend Pitch.
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