The tech downturn is changing the calculus of startup compensation.
(Bloomberg) — For employees, joining a startup can be like making a bet: That getting shares in the business will one day provide a lucrative payout, despite the long hours and instability. Rank-and-file staff who are in the right place at the right time – a hot company in a soaring market – can score millions. But even in the good times, many workers walk away without much to show for their stock options.
And this year is not poised to be a good time. Late-stage companies that were expected to enter the public markets this year are facing uncertainty, and big-ticket company sales have become increasingly rare. The result is less liquidity for startup workers, more interest in creative ways to cash out and, for many, at least a short-term hit to compensation.
Startup equity “is such a black box for people. You join a company and you sign this equity package, and the reality is you don’t know how it’ll work,” said Jaime Moreno de los Rios, chief operating officer at Secfi, which helps startup employees manage their shares. “People thought 2022 was going to be their year. All of a sudden things froze.”
On average, stock options make up about 86% of a Silicon Valley startup staffer’s net worth, according to a recent report by Secfi, which analyzed more than 4,300 stock option grants uploaded to its platform by employees last year. That means that many workers are badly exposed to declines in tech market valuations, which have hit both the public and private sectors. Meanwhile, about a quarter of companies on the Secfi platform reduced their internal valuations in 2022.
At the same time, a recent report from salary tracker Levels.fyi found that total compensation had fallen across a wide swathe of tech industry jobs in 2022.
Secfi’s Moreno de los Rios said that there’s been an uptick in startup employees interested in financing—a way to extract money from their stakes, even if there’s no clear opportunity to sell them on the horizon. Workers can borrow cash against their shares, and won’t have to pay it back if the shares go to zero. Kevin Swan, co-head of global private markets at Morgan Stanley at Work, which provides financial services for employees, said he’s also seen more companies try to get employees financing. “We’re now having an increased number of conversations with companies looking to explore how to do this,” Swan said. “We’ll see that continue to develop as we move further into 2023.”
In a turbulent environment, there are some silver linings for employees at companies that lower their internal valuations. Cheaper shares could mean more upside if the market recovers, and the possibility of lower tax bills for employees. Last year, according to Secfi’s report, startup staffers walked away from 36% to 54% of their vested stock options, leaving them to trickle back into their company’s equity stockpile — a move that meant those employees lost out on anywhere from $10,000 to $96,000 in assumed gains. One reason workers forfeit equity is that they don’t have the funds to foot the tax bill that comes along with exercising options.
Even in a market characterized by massive layoffs, companies are still aware of the need to keep their best employees happy. “There seems to be an increasing level of responsibility companies are feeling to take care of their employees,” Swan said. “In the tech market, talent is everything.”
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