Sep 22, 2023
Adapting to the New Norm: Insights from Carta's Startup Compensation Report
In the dynamic world of startups, where innovation and disruption are the norms, the landscape of employee compensation is experiencing significant shifts. The year 2023 has brought forth a unique set of challenges and opportunities, leaving startup founders, employees, and investors to adapt and strategize in response to these changes.
A Cooling Trend in Startup Fundraising
The startup ecosystem has witnessed a discernible chill in fundraising activities, with ripple effects resonating throughout the realm of employee compensation. According to a recent Carta article, in the first half of 2023, startups on Carta collectively raised approximately $28 billion. While this might seem substantial, it represents less than half of the total funds raised in the final quarter of 2021.
The declining spending capacity of startups has forced them to extend their financial runways, often at the expense of employee headcount. This year, venture capital-backed startups have trimmed their workforce significantly, resulting in tens of thousands of layoffs. Consequently, the focus on cost-efficiency has led to stagnant salary growth and limited expansion of equity packages, contrary to earlier expectations.
Data-Driven Insights from Carta
Carta, a platform renowned for its unparalleled access to data within the private market, has compiled a comprehensive compensation report. Drawing from over 280,000 employee records across startups using Carta Total Compensation and a wealth of insights from over 1 million employees in 40,000 startups managing their cap tables through Carta, the report offers valuable insights into the changing landscape of startup compensation.
Key Takeaways for H1 2023
A Sluggish Hiring Pace
One striking trend is the sharp decline in hiring velocity. According to Carta's report, during the first half of 2022, startups collectively hired over 314,000 employees. However, this number dwindled to just 129,000 in the first half of 2023. This drop in hiring activity reflects the cautious approach adopted by startups in response to economic uncertainties.
Salaries for startup employees have plateaued, with Carta's benchmarks revealing a 0.3% decline from November 2022 to May 2023. This stagnation can be attributed to reduced hiring and a more competitive talent market.
Shrinking Equity Packages
Equity compensation, a cornerstone of startup allure, has seen substantial reductions. From November 2022 to May 2023, average equity grant benchmarks have declined by a staggering 26%. This decline refers to the fully diluted percentage of total company equity that employees receive, reflecting the reality of a smaller piece of a less valuable pie.
Labor Market Dynamics
The dynamics of the labor market within startups have been closely monitored. While headlines about layoffs have subsided, tens of thousands of employees are still losing their jobs, with a peak in January 2023 resulting in 17,618 employees being impacted in a single month. Voluntary employee departures have also decreased, contributing to a drag on startup hiring in 2023.
The Equity Conundrum
One of the most notable shifts has occurred in equity packages. Startups have become less generous in their equity offers for several reasons. According to Carta, the influx of talented candidates has shifted negotiating power back to startups. Additionally, funding rounds have become scarcer, leading to more conservative use of option pools. Later-stage firms have also reduced employee grants due to falling share prices.
Hiring Geography and Compensation
Despite the changing landscape, startups have not necessarily rolled back the trend of remote work. A majority of companies still adjust employee pay based on their location. Interestingly, startups remain open to candidates residing far from their headquarters, with 58% of new hires in Q2 2023 located in different states.
Compensation by City
Compensation trends in different cities reveal intriguing insights. While compensation levels in various metro areas have been rising toward San Francisco levels, the cost of living remains a significant factor to consider.
In conclusion, the startup ecosystem in 2023 is grappling with challenges arising from reduced fundraising, declining hiring rates, and diminishing equity packages. Startups and their employees are adapting to a new normal, where financial prudence and cost-efficiency are paramount. Navigating this evolving landscape requires a keen understanding of data-driven insights and a willingness to adapt to changing dynamics, as highlighted in the Carta article.