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> The percentage of employees who exercised their vested options before expiration has now declined for five straight quarters, with the rate falling from 46% t

> The percentage of employees who exercised their vested options before expiration has now declined for five straight quarters, with the rate falling from 46% to 28% over that span. This is key to Carta’s business model, as they want to be the next SecondMarket / private market that flips employee stock in liquidity rounds for a hefty premium. Carta needs high employee engagement with stock compensation. It’s remarkable that they spend so little of this report on the topic.. if engagement stays low they’d need VC deal making to 10x to grow themselves. Why might engagement be low? Well besides the current economic environment, the implosion of SVB et al took with it a lot of venture debt, which may result in unusual dilution down the road. Also, employees are mostly just trying to get their jobs done versus VCs who were aware of the unusual bank fragility. Overall, employee stock-based comp has taken a huge downturn in real value (if not paper value). The top start-ups need to innovate new compensation packages when the bull market returns.

ryanSrich 3y ago
It also can’t be overstated just how expensive things have gotten. I’d wager a large percentage of the exercise decline is due to employees having less cash.
- choppaface 3y ago
  Yeah I’m trying to allude to that, but the bank failures make the probability of “my options round down to zero or less than that (via taxes)” significantly higher. In the 2008 financial crisis the problem was in an adjacent industry, but here in the SVB case the banks are failing at basic compliance as well as trying to juggle crypto fraud. The information disparity between VCs (whose job it is to convince banks that the venture asset class is worthwhile) and employees is bigger than ever. Right now, like maybe Stripe is worth taking the risk to exercise, and Clubhouse borderline because they have $100m in funding. But most other early stage companies, there’s much bigger risk that the company’s projections look ok to the employee so they exercise. But then the existing funding busts and then the employee ends up paying taxes on something that’s worthless. And the bankers / VCs likely had the info to know it was worthless at the time of exercise.
umeshunni 3y ago
> the implosion of SVB et al took with it a lot of venture debt, which may result in unusual dilution down the road Can you explain what this means? Does it mean (1) SVB used to a major holder of venture debt (2) Now that they don't exist, no one is likely to buy venture debt (3) therefore, companies have to issue more equity, leading to dilution
- choppaface 3y ago
  I’m not aware of banks as friendly today towards venture debt (really small business loans) as SVB et al were. There was probably a bubble in lending there in part due to crypto fraud. (VCs of course want this marketed as the Fed disrupting their house of cards through raising rates). Will start-ups just issue more equity? It could be more likely they simply fail to raise anything.
solatic 3y ago
> Why might engagement be low? Easy. The whole point of owning stock is to (a) have the right to vote in elections for the Board, (b) have a share of dividends, (c) potentially sell for a profit in the case of an acquisition or IPO. If the company is private, with no exit in sight: (a) isn't true in your case, as your right to vote is taken away from you, (b) is a pipedream, because the company is either not profitable or because profits are being re-invested into growth. In a bad economy, where you're trying to build up savings because you have no real idea if you or your partner or someone in your family is going to be laid off in the near future, where exercising options requires both a large cash expenditure on the part of the employee and a huge leap of faith that, in the span of years, there will be some kind of a return... Stock-based compensation means very different things in VC-controlled and non-VC-controlled companies. Stock-based compensation is "real" in non-VC-controlled companies (be they bootstrapped businesses or large public enterprises) because there's actually a legitimate chance at a dividend issue and/or a real (if small) voice in Board elections. But the value of stock compensation in VC-controlled firms entirely depends on whether the firm is going to be a VC-style success. If it's not a portfolio winner, then the employees don't win either. And employees have a front-row perspective on whether the company is a portfolio winner.
- choppaface 3y ago
  > And employees have a front-row perspective on whether the company is a portfolio winner. This is often false, especially for ICs. The C-levels in early stage companies hide a lot of key info (intentionally or not). The most material info like the cap table and the relationship with investors (especially record of “no” answers received) is never shared.

ryanSrich 3y ago

It also can’t be overstated just how expensive things have gotten. I’d wager a large percentage of the exercise decline is due to employees having less cash.

choppaface 3y ago
Yeah I’m trying to allude to that, but the bank failures make the probability of “my options round down to zero or less than that (via taxes)” significantly higher. In the 2008 financial crisis the problem was in an adjacent industry, but here in the SVB case the banks are failing at basic compliance as well as trying to juggle crypto fraud. The information disparity between VCs (whose job it is to convince banks that the venture asset class is worthwhile) and employees is bigger than ever. Right now, like maybe Stripe is worth taking the risk to exercise, and Clubhouse borderline because they have $100m in funding. But most other early stage companies, there’s much bigger risk that the company’s projections look ok to the employee so they exercise. But then the existing funding busts and then the employee ends up paying taxes on something that’s worthless. And the bankers / VCs likely had the info to know it was worthless at the time of exercise.

umeshunni 3y ago

> the implosion of SVB et al took with it a lot of venture debt, which may result in unusual dilution down the road Can you explain what this means? Does it mean (1) SVB used to a major holder of venture debt (2) Now that they don't exist, no one is likely to buy venture debt (3) therefore, companies have to issue more equity, leading to dilution

choppaface 3y ago
I’m not aware of banks as friendly today towards venture debt (really small business loans) as SVB et al were. There was probably a bubble in lending there in part due to crypto fraud. (VCs of course want this marketed as the Fed disrupting their house of cards through raising rates). Will start-ups just issue more equity? It could be more likely they simply fail to raise anything.

solatic 3y ago

> Why might engagement be low? Easy. The whole point of owning stock is to (a) have the right to vote in elections for the Board, (b) have a share of dividends, (c) potentially sell for a profit in the case of an acquisition or IPO. If the company is private, with no exit in sight: (a) isn't true in your case, as your right to vote is taken away from you, (b) is a pipedream, because the company is either not profitable or because profits are being re-invested into growth. In a bad economy, where you're trying to build up savings because you have no real idea if you or your partner or someone in your family is going to be laid off in the near future, where exercising options requires both a large cash expenditure on the part of the employee and a huge leap of faith that, in the span of years, there will be some kind of a return... Stock-based compensation means very different things in VC-controlled and non-VC-controlled companies. Stock-based compensation is "real" in non-VC-controlled companies (be they bootstrapped businesses or large public enterprises) because there's actually a legitimate chance at a dividend issue and/or a real (if small) voice in Board elections. But the value of stock compensation in VC-controlled firms entirely depends on whether the firm is going to be a VC-style success. If it's not a portfolio winner, then the employees don't win either. And employees have a front-row perspective on whether the company is a portfolio winner.

choppaface 3y ago
> And employees have a front-row perspective on whether the company is a portfolio winner. This is often false, especially for ICs. The C-levels in early stage companies hide a lot of key info (intentionally or not). The most material info like the cap table and the relationship with investors (especially record of “no” answers received) is never shared.