Startups in 2023 are Facing Compensation Markets Unlike Any in Recent Memory, Carta Report Reveals

Startups in 2023 are facing compensation markets “unlike any in recent memory,” according to an update from Carta.

Layoffs have “afflicted large, public tech companies as well as companies across the VC ecosystem.”

In the private markets, declining valuations and increasing intervals between funding rounds are “motivating founders to conserve cash and extend runway—and payroll is the primary driver of cash burn.”

In a report shared by Carta, they have looked into “the most significant changes to the compensation market since publishing their debut State of Compensation report and attempt to shed light on a few key questions.”

Carta has looked into how these protracted layoffs affected tech compensation and  how startups have adjusted hiring plans to fit the new normal. And also founders are inclined to hire international talent ensure they’re paying competitively.

At Carta, they see it as their responsibility “to share the insights that come from an unmatched amount of data about the private market.”

This compensation report is “drawn from more than 216,000 employee records from startups that use Carta Total Comp.”

They also layer in metrics “on employee movement from the aggregate pool of more than 1 million employees currently working for the 33,000 startups that use Carta to manage their cap tables.”

While the majority of the data presented deals with changes in base salaries (with a dash of variable compensation), they’ve also shared updates in equity compensation in their  equity addendum.

H2 2022 highlights

Salaries have stopped rising: The average salary band in Carta Total Comp “rose 2.1% from April to August last year. From August to November, the average fell 0.4%.”

Layoffs are “impacting all sectors: Laid off employees accounted for 52% of all employee departures in December 2022 after representing just 13% of departures in July 2021.”

Hiring is “not keeping pace with departures: Net headcount growth across Carta cap table companies turned negative in September 2022 and has yet to rebound.”

Employee movement

Carta data on employee movement—who leaves their company, who joins another, and whether those departures were voluntary or involuntary—is “drawn from across our more than 33,000 startups on platform.”

This provides Carta “nearly unmatched visibility into hiring trends across the private markets.”

Layoffs as a percentage of monthly employee departures

The headlines have it right: Startup employees are “getting laid off at higher rates than at any point since 2020.”

Economic uncertainties “provoked by the global pandemic sparked a sharp layoff spike that quickly subsided.” The current mix of difficult fundraising and declining startup valuations has caused “a prolonged layoff season.”

Layoffs have been “rising across virtually every major startup industry.”

Fintech has “had an especially rough few months, but no sector has escaped unscathed.”

One underrated consequence of rising layoffs at startups is “that employees are choosing to remain in their current roles for longer.”

Uncertainty about the present job market and widespread layoffs “make the Great Resignation of late 2021—early 2022 feel like the distant past.”

As companies see less voluntary turnover, they may “reduce hiring plans further from their already diminished projections.”

Compared to years past, hiring as “a whole is down across the startup ecosystem.”

Carta expects those orange bars “representing negative headcount growth over the past several months to rise slightly as Carta becomes aware of hires who have already joined—but the trend is unmistakable.”

From March 2022 onward, each month “saw companies on Carta grow, in aggregate, less rapidly than they had the year before.”

Over the summer, growth slowed “to a crawl before turning negative last September.”

It will “be illuminating to see what the final growth figure is for January 2023 (as January has been the best new-hire month each year since 2018).”

Many companies are “making do with less.”

Payroll is still “the primary driver of cash burn for most companies, causing many to rethink their headcount projections in light of new fundraising dynamics.”

Median headcount and payroll ($USD) for companies “in each valuation tier as of Jan 1, 2023
Company payroll typically crosses the $1 million threshold around the time the company reaches a $10 million valuation.”

A company typically “breaks through the $10 million payroll threshold when it has 60-80 employees.”

Payroll, headcount, and company valuation “don’t scale at the same pace.”

Because payroll is a function of headcount, the two metrics “scale alongside each other. Company valuation, however, scales faster.”

Companies in each valuation tier “tend to cluster around specific headcount ranges. For instance, about three quarters of companies worth less than $25 million have fewer than 25 employees.”

Headcount growth “slowed significantly for smaller startups and turned negative for larger companies in the second half of 2022.”

As valuation resets for public tech companies took their toll on private valuations, many startups were “forced to conserve cash by curtailing hiring plans and, in some cases, conducting layoffs.”

Median payroll ($USD) by valuation tier “at 6-month intervals and percent change from prior time period.”

Payroll shows “a similar dynamic to overall headcount: impressive growth over the first half of 2022, followed by a much reduced rise from July through December.”

Across the startup ecosystem, January 2022 was “a month of unprecedented hiring.”

Companies on Carta “added 3.9 employees for every one who left that month.” That ratio fell with “every passing month last year.”

Percent of all employees and payroll “spent by function across Carta Total Compensation companies.”

As expected, the largest job function “across Carta Total Comp startups is engineering. Just under a quarter of employees are classified as engineers.”

Engineering accounts for “an even more impressive share of headcount in smaller companies.”

Nearly 60% of headcount—and over 60% of payroll—is “spent on the top five functions (engineering, sales, operations, marketing, and customer success).”

For other job functions, startups are “unlikely to have many employees until their growth requires it.”

The first HR hire, for example, is “on average the 22nd employee.”

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