The Changing Economy Is Changing Startups

Lightspeed’s annual HR and Recruiting Trends Report surveyed how 190 startups are preparing for economic uncertainty in 2023 and beyond.

No one said startups were easy, but 2022 has been exceptionally hard for founders and employees at companies trying to build new businesses.

Companies that only recently recovered from the shock of Covid now face a looming recession and record levels of inflation. As end-of-year performance management and compensation cycles loom, every executive team is wondering: How do we support employees while protecting the viability of the business?

Startups are often forced to make decisions with incomplete data. And sometimes they only have one shot to get it right. As investors across consumer, enterprise, health, fintech, and more, Lightspeed is fortunate to have a broad view across the startup ecosystem.

Our explores trends from 190 companies. We hope this guidance will help you make decisions in this uncertain climate, by understanding how your peers are navigating the same choppy waters.

Our overall finding is this: In the face of market volatility and high inflation, startups have largely stuck to their playbooks — so far. Even so, they have opportunities to increase employee satisfaction by thinking and acting unconventionally as they gain clarity on our economic future.

Inflation is not driving salary increases

When public and private market valuations contract, conserving cash becomes a companywide priority. In the face of 8% inflation, 59% of companies are unlikely or undecided on raising salaries to match.

While inflation is not driving wage growth, compensation parity requirements may result in salary increases, with 68% of companies somewhat or very likely to adjust salaries to address pay equity.

End-of-year salary adjustment budgets remain unchanged from historical averages, with 29% of companies targeting 5–6% and 23% targeting 3–4%.

The challenge: Given historically high inflation, companies will have to make difficult decisions on how to allocate their salary increase budgets. Leaders should expect employees to ask about inflation matching and some may decide to leave the company if their real wages decline.

The opportunity: Companies must communicate effectively about their decision-making processes and financials to earn employees’ trust and goodwill.

Equity approaches remain unchanged despite market instability

Companies do not plan to offset lower 409a valuations by changing their equity strategy. 64% are unlikely to reprice options and 69% are unlikely to give additional grants to account for a lower valuation. In the short to medium term, this means some employees will be underwater in the value of their equity grants.

As of this report, 67% of companies have not changed their equity approach despite 2022’s market turmoil.

The challenge: Equity is a major component of startup compensation. Stock grants are used to both attract and retain employees. As companies receive lower valuations compared to previous rounds, some employees will have underwater options and may lose confidence in their long-term value.

The opportunity: Companies can consider alternative equity grant structures and compensation strategies that would allow employees to participate in economic recovery while limiting further downside exposure. Such adjustments are a show of good faith and confidence to employees, investors, and prospective recruits.

Companies are not cutting back on benefits

Many companies are finding that even in this volatile economic environment, they must provide compelling benefits even at increased cost. 94% are keeping or expanding their benefits regardless of year-over-year cost increase.

Contrary to about a pullback in parental leave benefits, 98% of companies are keeping or expanding their offering.

The challenge: While cost cutting may be necessary to ensure a company’s stability, reducing benefits is very uncommon and will put them at a disadvantage in hiring and retaining employees.

The opportunity: HR departments can explore low or no cost additions to core benefits packages that increase value and utility for employees. Warning: if your company’s financial situation requires reducing core benefits like health or dental insurance, or parental leave, it’s not the right time to add a soft benefit like free event tickets or gift cards in an attempt to make up the difference; it won’t.

Navigating uncertain times is never an easy task. Facing constraints head on with honesty and transparency goes a long way in helping employees feel included in the dialogue and allows employees to share in the problem solving.

Parting wisdom

Be transparent and genuine, and communicate what you can as soon as you can. We often see that when you approach challenging times with these guidelines in mind, it ultimately yields a stronger team.

Think of this then as your moment — connect with your employees in a deeper, meaningful way, and build a level of trust and engagement that will serve you well for the years to come.

A special thank you to Jackie Williams, Lightspeed’s Knowledge Manager and the driving force behind the survey, and Luke Beseda, People Infrastructure Partner at Lightspeed.


About Lightspeed: Lightspeed Venture Partners is a multi-stage venture capital firm focused on accelerating disruptive innovations and trends in the Enterprise, Consumer, Health, and Fintech sectors. Over the past two decades, the Lightspeed team has backed hundreds of entrepreneurs and helped build more than 500 companies globally including Affirm, Carta, Cato Networks, Epic Games, Faire, Forty Seven, FTX, Guardant Health, Mulesoft, Netskope, Nutanix, Rubrik, Sharechat, Snap, TripActions, Udaan, Ultima Genomics and more. Lightspeed and its global team currently manage $18B across the Lightspeed platform, with investment professionals and advisors in the U.S., China, Europe, India, Israel, and Southeast Asia.

Faction Ventures, LLC (“Faction”) and Lightspeed Management Company, L.L.C. (“Lightspeed”) are separate businesses that operate independently of each other. Faction is a registered investment adviser under the United States Investment Advisers Act of 1940, as amended. Faction advises its own fund(s) and does not advise any Lightspeed clients, and Lightspeed does not advise Faction or any of its clients. Lightspeed and Faction are parties to an agreement pursuant to which Lightspeed holds certain interests in Faction and the fund(s) Faction manages.

Lightspeed Possibility grows the deeper you go. Serving bold builders of the future.