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Understanding Startup Comp
If you’re joining a startup, negotiating your compensation is one of the most important issues. Unlike more traditional jobs, startup compensation structures are fluid, transparency within companies is rare, competitive benchmarking is difficult, and accurately predicting future valuations is near impossible. Mistakes can cause deep frustration, while well-negotiated packages can be lucrative and open opportunities to scale your contributions at your firm. We can’t overstate the importance of a strong negotiating strategy.
There are several issues to consider when negotiating your package:
1. Know (and respect) your opportunity cost
There is a reason your potential employer is looking to hire you; you are talented. Start with your current comp, and think how it might scale in the future. Too often, clients assume best-case scenarios regarding equity at startups, and thus end up disappointed when they are diluted or exit events are delayed. As one of our clients suggested, “Unless you are REALLY sure you want to be there for 3-4 years, discount your options to zero.”
If you’re currently making $150K/year in total comp, make sure your startup comp package is somehow comparable to that number. True startups will likely provide more of your comp in equity vs. cash and benefits (which can be a good thing – see below). However, you deserve to do extra diligence that equity will actually fill whatever cash gap you’re expected to swallow in the short-term. If your comp package falls significantly short, or you get pushback from your potential employer, it may be a sign that they won’t value you at your true market value.
2. Know the Company’s stage of funding
Most startups hire after seed funding or Series A, when they have more cash to hire. Ask for relevant terms of their last fundraising, such as contractual dilution protection, implied valuation, and terms related to exit timetables. If they won’t share, take any equity valuation with a grain of salt (i.e. zero). And make sure that vesting schedule fits where you are in life (spouses, kids, exploring other careers, etc.).
2a) Compare your risk with others
Related to knowing your company’s stage of funding is to compare your risk profile with others. Are you one of the first five employees? If so, your risk of joining, and likely contributions to the company, rival those of co-founders. While co-founders will (and should) get a premium for the idea, should that premium be 20-30x?
3. Ask about future compensation philosophy
As your company grows, make sure you negotiate increases to your compensation, so you grow alongside. Also, recognize the compensation structures could grow unevenly, so understand how your company plans to compensate people at similar levels. At most companies, salary scales will likely converge according to levels (with exceptions), but equity grants will likely remain uneven, with little transparency. All things being equal, this suggests substituting short-term salary for equity, as your salary will likely adjust upwards with new hires, while equity won’t get adjusted downward once granted.
4. Consider the value of other benefits
Healthcare, vacation, 401K matching and other items can add up – make sure you’re clear on the policies and the actual benefits you’ll receive before you sign. Too often, candidates can overlook benefits that would be valued at many thousands of dollars because they don’t have the chance to read the fine print.
Want to read more?
For handy resources and additional perspectives, try the following:
- Progressive Equity – As company grows, so does employees’ stake
- Open Equity – Making equity transparent for everyone in the company
- A Detailed Guide to Equity Compensation – An incredibly handy reference guide
Databases our clients recommend – see which best fit your needs!
Note: Special thanks to all our clients who provided ideas and perspectives into this piece!