startups

Tech’s diversity problem is even bigger than we realized — here’s why that’s so bad for the next generation of startups


caption
The value of the equity held by female founders such as 23andMe’s Anne Wojcicki is a small fraction of that held by their male counterparts.
source
Steve Jennings/Getty Images for TechCrunch
  • Silicon Valley has long had a diversity problem.
  • Women, African-Americans, and Latinos are underrepresented in
    the tech industry and tend to be paid less than their white male
    counterparts.
  • But the diversity problem is even worse than that; a new
    study found that the gender disparity in equity – or stock
    ownership – held by tech workers and founders is even worse than
    the pay gap.
  • In Silicon Valley, stock holdings can be much more important
    and valuable than salaries.
  • The disparity is important, because Silicon Valley’s
    ecosystem centers around startup founders who cash in their
    shares when their companies go public or are acquired.

It’s no surprise that the tech industry has a diversity problem.

But it turns out that the problem is much bigger than people in
Silicon Valley and beyond may have realized.

It’s well known that women, blacks, and Latinos are
underrepresented in tech companies
, particularly in the upper
ranks. It’s also well known that they tend to get paid less
in salary for the same jobs
than their white male
counterparts. But the tech industry has a far larger divide
that’s been mostly kept secret until now, having to do with the
ownership of companies.

Much of the payoff that tech workers get from working in the
industry comes in the form of ownership stakes in their
companies, whether in the form of founders’ shares or stock
options or restricted stock. It turns out that distribution of
those shares is even more titled in favor of men than pay or
representation within companies,
a recent study
from Carta found. And the underlying value of
the shares is even more weighted in favor of men.

“It was even worse than we expected,” said Chloe Sladden, a
member of the #Angels
investing group
, whose February
blog post
inspired Carta’s study.

Women hold just 9% of the wealth linked to shares in tech
startups

Carta offers an online service that helps companies manage their
employee-owned shares and options. For its study, it looked at
the private, venture-backed companies in its database. It didn’t
have direct information on employees’ gender, but inferred it
from their names, excluding those that were ambiguous. By
definition, all the people included in the study held some sort
of ownership stake in their companies; employees that don’t have
options or shares in their companies aren’t in Carta’s database.

Chloe-Sladden

caption
Chloe Sladden, one of the members of the #Angels investment group, which inspired the pay equity gap study.
source
about.me

Women comprised 33% of the
people in the study; in other words, they made up about a third
of all employee shareholders. But their shares were worth just 9%
of the total value held by all employee owners in the study. Of
the $42.6 billion held by the startup founders or workers
included in Carta’s study, just $4 billion was held by women.

Much of that imbalance is due to the paucity of venture-backed
female founders and the value of the firms they lead. Women
represent just 13% of all the founders in Carta’s database. And
their share of the total value of founder-held shares is only 6%.

“There’s just a disproportionately low amount of capital going to
back women,” said Jana Messerschmidt, another member of the
#Angels group.

Women do better as employees than as founders, but they still are
getting a raw deal when it comes to equity stakes in their
companies. Some 35% of non-founder employees in Carta’s database
are women. But their shares are worth just 20% of the total value
held by such employees.

Put another way, women tech workers hold about 47 cents worth of
equity for every dollar held by their male counterparts.

Startups don’t tend to bring on women until later

Women lag behind men in part because they tend to be a small
minority of the early employees at tech companies. At firms with
20 or fewer equity-holding employees, just 29% are women, on
average. Even at companies with 101 to 400 equity employees,
women make up just 35% to 36% of those workers. It’s not until
firms get to more than 400 workers that their portion of
employee-owners who are women goes north of 40%.

By comparison, women comprise some 47% of workers in the total
private US workforce.

Their low representation at early-stage startups is important.
Early workers tend to get more valuable share grants than later
workers, in part because they get in on the ground floor, when
the company is usually worth very little.

Additionally, a disproportionate portion of the early hires at
startups are engineers or developers, workers who are typically
seen as vital to the startups’ success and often paid
accordingly. Women tend to be dramatically underrepresented in
such positions.

Startups generally wait until later in their development to fill
out the departments where women are more prominent, such as
marketing, human resources, and sales – and they tend to award
them with fewer and less valuable shares.

“The amount of equity that’s given to employees decays over
time,” said Henry Ward, Carta’s CEO.

The study had some notable shortcomings. Carta’s database doesn’t
actually include equity holders’ gender. The company inferred
gender from the holders’ names, excluding those from its study
that were ambiguous. So the equity disparity could be somewhat
bigger or smaller than what Carta found.

Additionally, the database doesn’t include any data about
holders’ race or ethnicity. So, Carta wasn’t able to look at the
equity differences among different groups. Those too are likely
to be significant. African-Americans and Latinos have long been
grossly underrepresented in the tech industry. And a recent study
indicates that members of those groups tend to be in lower-paying
positions on average than their white counterparts and, even
accounting for that, tend to be paid less than whites in
comparable positions.

This is more than just a problem for the 1%

To be sure, compared with other inequality problems the US faces,
disparity in equity compensation and holdings may seem rather
trivial. Many workers – particular those in lower-skilled jobs –
don’t get health care benefits or sick days, much less stock
options.

Carta, Henry Ward

caption
Henry Ward, CEO of Carta, which conducted the study.
source
Carta

Tech
workers, meanwhile, are generally well compensated overall,
regardless of how many options they get. And when you’re talking
about founders, you’re often talking about people in the top 1%
of income earners.

But the disparity does matter, at least in terms of its
downstream consequences. Much of Silicon Valley’s ecosystem is
built around the equity held by successful startup founders.
Those founders often take their payouts when their firms are
acquired or go public and use them to create other firms or to
fund other entrepreneurs through so-called angel investments.

Many also join venture capital firms, where they help determine
which of the next generation of startups get funding, or sit on
tech company boards, where they help shape the composition of
executive teams. They also often use their startup payouts to set
up foundations that give out money to their preferred charities.

Silicon Valley is a clubby place. Founders tend to hire people
who look like them, went to college with them, or run in the same
social circles. VCs
tend to invest in companies with founders that either look like
them or look like founders who succeeded in the past
. In both
cases, the people who get funding or top positions tend to be
male and white or, to some extent, Asian.

And that’s become something of a cycle. White male VCs fund
startups run by white men who, when they cash out, become VCs who
fund the next generation of white male entrepreneurs.

So the disparity in equity in Silicon Valley doesn’t just affect
who’s seeing the big bucks when a company goes public, it also
affects who gets funded the next time around, who gets hired,
what products and services are developed, and what communities
see investments.

“In Silicon Valley, money from a successful exit is about more
than just wealth,” said Sladden. “It’s the power to shape and
choose the products and institutions that shape Silicon Valley
the for next generation.”





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