Salary vs Equity at a startup

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wbadbada
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Salary vs Equity at a startup

Post by wbadbada » Tue Nov 13, 2018 12:40 am

Got an interesting compensation question during an interview: What is your compensation risk profile in terms of percentages of salary and equity? 50/50? 80/20? 100/0?

How would you guys go on about choosing this? Luckily, the hiring manager told me to think about it if I'm extended an offer. Regardless, I'm going to try to negotiate salary as much as I can.

Zombies
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Re: Salary vs Equity at a startup

Post by Zombies » Tue Nov 13, 2018 12:52 am

The question is asked correctly — what is YOUR risk profile?

I had a friend who tried to go 100% equity at a startup, but they said they had to pay him some nominal amount for legal reasons.

When I joined a startup, I was offered two options — a decent salary and a good amount of options, or a high salary and a decent amount of options. I asked for the high salary and a great amount of options ;) We ended up agreeing to the high salary and the good options — essentially the top of each category. I imagine that was always the plan from the company’s standpoint, although they occasionally get away with some people not negotiating.

A lot of people say “value options at zero” — I think that’s poppycock. Discount the options significantly, but just risk adjust them — don’t drop it all the way to zero. Then see if that total comp package is interesting to you.

vieques
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Re: Salary vs Equity at a startup

Post by vieques » Tue Nov 13, 2018 12:54 am

The answer here will depend on a large number of factors that you haven't highlighted (role seniority, the funding status of the startup, current financial status, etc.).

That said, here are a number of reasons to work at a startup including rapid career advancement that might not be possible in a larger organization. In which case, maybe you are OK optimizing for salary. While I have always valued startup equity as 0, it is also the only meaningful way to quickly build wealth if the startup goes somewhere. It is also hard to figure out what equity is really worth (common vs. preferred pricing, how 409A valuations work, etc.) and so, hard to think of it as a percentage split. http://fortune.com/2016/09/27/the-compl ... companies/ (and the host of links in the article) might help you though.

Finally, if you really want to be optimizing for salary and the startup is pre series C funding, you might want to go to a larger company. It also sets the wrong tone to optimize for salary at an earlyish startup.

Personally, I have always optimized for equity at startups.

nordsteve
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Re: Salary vs Equity at a startup

Post by nordsteve » Tue Nov 13, 2018 3:07 am

Some articles on your question:

https://hackernoon.com/valuing-stock-op ... b223a74bb8

https://maxschireson.com/2011/08/23/sta ... explained/

Pay particular attention to liquidation preference when valuing your shares. It's not unusual for investors to get their money back and employees to get nothing -- this article while long is a good read on the topic.

dcabler
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Re: Salary vs Equity at a startup

Post by dcabler » Tue Nov 13, 2018 7:01 am

wbadbada wrote:
Tue Nov 13, 2018 12:40 am
Got an interesting compensation question during an interview: What is your compensation risk profile in terms of percentages of salary and equity? 50/50? 80/20? 100/0?

How would you guys go on about choosing this? Luckily, the hiring manager told me to think about it if I'm extended an offer. Regardless, I'm going to try to negotiate salary as much as I can.
Interesting. I've worked at a couple of startups and was never asked this question, nor as a hiring manager did I ever ask this question. Salaries are generally lower than at established companies and amount in equities is generally higher. And like many companies, unless you're in the C-Suite or a founder, there's not a lot of wiggle room on the equity side. I suspect the question was a pre-cursor to trying to understand whether you would accept an offer that was heavily weighted towards equities: that's a stumbling block for many people who are not accustomed to that world.


On a related note regarding stock options. In startups, it's common for the company to have the first right of refusal. If for some reason you quit or are let go before a liquidation event (IPO, acquisition), the company would have the first right of refusal to purchase your shares, usually "at-cost". Meaning you walk away with nada and you've spent some amount of time working crazy hours for a lower salary, falling behind where you might have been at an established company. It's seldom brought up during the interview process and it also is generally non-negotiable.

Good luck!

quantAndHold
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Re: Salary vs Equity at a startup

Post by quantAndHold » Tue Nov 13, 2018 9:03 am

Back in the 90’s it was possible for an early employee to make bank with a good amount of options. In 2018, the deals are usually structured so that the VC’s get all of the money, and even with a “good” option grant, the employees will either get nothing or very little, and the wait for the payoff, if there ever is one, will be very, very long. Even with what has been going on in tech the stock market, I can’t think of a single colleague who has made any money on a startup in this decade.

Take the salary.

Thegame14
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Re: Salary vs Equity at a startup

Post by Thegame14 » Tue Nov 13, 2018 9:45 am

ID stick to as much salary as possible I have worked at two failed startups, so equity is worthless in both cases I have been in.

k73
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Re: Salary vs Equity at a startup

Post by k73 » Tue Nov 13, 2018 10:13 am

Thegame14 wrote:
Tue Nov 13, 2018 9:45 am
ID stick to as much salary as possible I have worked at two failed startups, so equity is worthless in both cases I have been in.
And on the other side, I worked at one where there was a 20% pay cut across the company to keep the doors from closing. (in addition to most everyone already putting in an extra 30ish hrs/week). It ended up being successful in that it was acquired and my equity was not worthless, however the equity value was not enough to compensate for the paycut and all the extra hours I put in.

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RickBoglehead
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Re: Salary vs Equity at a startup

Post by RickBoglehead » Tue Nov 13, 2018 10:46 am

The percentages can't be consider outside of the dollars, and of course the risk profile. Equity is a crapshoot / lottery. For many it's ultimately worthless. If the salary exceeds your requirements to live comfortably, then the equity is icing on the cake.

Years ago I joined a company which had a buy-in, which was "optional". Everyone who joined at my level had purchased high 5 figures, which was the suggested amount. I demurred, saying I wanted to wait until I had relocated and gotten a mortgage, since the funds were "loaned" to buy the equity and it would impact my ability to qualify for a mortgage.

I ended up leaving in less than a year, never relocated. Stock was worthless, no one got a dime, everyone lost high 5 figures.
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MotoTrojan
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Re: Salary vs Equity at a startup

Post by MotoTrojan » Tue Nov 13, 2018 11:08 am

I left a large startup that was buying back my equity for a brand new moonshot company. I biased towards more salary to try and maintain the same income I was making from the previous companies equity, but my new equity would still be 7-figures with any reasonable amount of success (I took half of what a smaller salary would’ve grabted). It’s just like picking an individual stock; you won’t know the right answer for a decade or so. I’ll let you know in a decade if I regret it.

N10sive
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Re: Salary vs Equity at a startup

Post by N10sive » Tue Nov 13, 2018 11:22 am

I didn't see this mentioned, but another thing to think about is what kind of options.

Are the NQSO or ISO? That would also weigh heavily into my decision and then of course how well I think the companies tech is/the chance it will be bought(hard to know right off though).

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alpine_boglehead
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Re: Salary vs Equity at a startup

Post by alpine_boglehead » Tue Nov 13, 2018 11:31 am

Take as much salary as you can get. Having equity in a startup is like investing in one single ultra-microcap stock. Not really anything you'd do from an investing point of view, right?

E.g. if you exchange $10k salary for more stock options, that's like investing that $10k in that company. Would you pick just about any startup and invest $10k into it?

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GoldStar
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Re: Salary vs Equity at a startup

Post by GoldStar » Tue Nov 13, 2018 1:39 pm

I usually try to answer that type of question as something like "I really believe in this company and what we will achieve here so am definitely interviewing with the assumption this will have an potentially high upside due to equity. However, I also have a family to support so I'm not looking to take a salary reduction either from my current job". It lets them know you want BOTH - a high equity component but without sacrificing too much salary.

With startups you are giving up some stability for the potential upside of big equity gains. I wouldn't also give up too much salary in the bargain.

(EDIT Add: worked for and was a hiring at multiple start-ups. It used to be for West Coast start-ups, and employees, it was about equity first and salary second while with East Coast start-ups it was the other way around. That no longer seems to be the case).

CAP_theorem
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Re: Salary vs Equity at a startup

Post by CAP_theorem » Tue Nov 13, 2018 1:57 pm

I value equity in 99% of non-public companies at 0. Because that reflects the reality.

Common stock in private companies is a scam and shady stuff going down is the norm. In the unlikely event that liquidity occurs you would be shocked at what people who have just earned FU money will do to get some more. The only thing that keeps them in line is when the company is big enough they can't get away with doing it under the radar.

The people who "matter" are going to take money off the table well before you even have a hope of seeing liquidity.

The tax implications are not good either. Is this restricted stock and you will owe taxes on something that is probably worthless? Is it ISOs that expire right after you leave the company forcing you to put down money not only to exercise, but additional money for the tax man?

The deck is heavily stacked against you. Why not work for a company that compensates you with real money and publicly traded stock? My guess is the risk adjusted return is much greater. I know more people who have come out behind than have come out ahead of where they would be if they had gone to a company that compensates well. Everyone remembers the winners and forgets the legions of losers.

https://danluu.com/startup-options/
https://danluu.com/bimodal-compensation/
https://danluu.com/startup-tradeoffs/

Skiandswim
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Re: Salary vs Equity at a startup

Post by Skiandswim » Tue Nov 13, 2018 4:16 pm

For a startup, you must be comfortable with cash burn rate and funding strategy for next round of investment. A startup hiring someone should be very transparent.

Most startups do not survive. Cash compensation for a startup often matches the general market, since you are taking a significant company risk. Options are for long term retention and motivation.

Equity is a key long-term incentive in hiring talent for startups. Ask the firm to provide their 409A valuation for common stock if you get an offer. The report can provide many insights. It will also list a fair market value estimate of the stock price (versus their informal projected value). Note that common stock may have a lower valuation than preferred stock, which is often held by investors. Without an active secondary market, you might have to wait many years for liquidity, assuming the firm survives.

I would ask for a fair market cash salary and ADD stock options to balance the risk of a startup.

TheOscarGuy
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Re: Salary vs Equity at a startup

Post by TheOscarGuy » Tue Nov 13, 2018 4:20 pm

wbadbada wrote:
Tue Nov 13, 2018 12:40 am
Got an interesting compensation question during an interview: What is your compensation risk profile in terms of percentages of salary and equity? 50/50? 80/20? 100/0?

How would you guys go on about choosing this? Luckily, the hiring manager told me to think about it if I'm extended an offer. Regardless, I'm going to try to negotiate salary as much as I can.
This makes little sense if they have not offered any job.
Also, startup equity doesn't necessarily mean anything if the company isn't viable, isn't bought, or doesn't go public. So that part of compensation is risky.
I would say 100/0, your numbers, and on top of that equity would be my choice, if they really want me :D I can work for startups only for higher compensation, due to higher risk taking on my part.

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