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Pay, Equity and Startups
I’ve had the question about ‘what should I do about this offer of equity’ several times in the past few weeks.
The answer depends on who you are. And what you want.
I’m gonna talk about this in terms of the ‘self-interested’ individual. This is your life and your career.
This is merely my take and how my brain works, other opinions are available.
Let’s get this out of the way first as it is the most straightforward. There are many ways to subdivide a company based on effort, commitment & risk.
As a co-founder of any sort, with critical skills to the business, you should be as near to parity as you can be with the other founders, as long as you all stay for the vesting period.
You will have the stress, the difficult conversations and be ‘sold’ to investors as a team. Ensure you are properly valued by your peers.
To feel like you are under-represented in your own company is not a good feeling.
It also introduces huge risk if there isn’t a level of equitability, if you have critical skills to the business you are most likely a pretty in demand person, so you have to know your personal sacrifices are worth it in the medium term.
Early employees (first one or two outside the founding team)
Entrepreneurs are enthusiastic, charming dreamers. This means they are fun to work with, however it also means they overestimate their probability of success.
Your equity may be worth nothing. Do not bank on it. This of course is more pressing for founders, but then the rewards for success are pretty much always in the life-changing category, so the risk/reward is balanced differently.
Founders also genuinely believe that on the occasion of an ‘exit’ you will become genuinely rich. They are likely wrong unless you are Facebook.
Considering the general likelihood of failure (of all startups) and the small chance of an exit in Singapore, I’ll make some high-end assumptions…
If you get an offer of 2% over four years and the company sells for $30m you end up with $600k. Which is a lovely outcome. At this point we’re talking life changing money… as in, you’ll mostly be able to buy property and ease your day to day. However, the yacht will have to wait.
More likely given Singapore’s recent exits (Tencube, HGW) you’re more likely to get 0.5% at $10-15m after four years. This is 120k, which still seems like a lot of money, until you factor in any pay reduction you’re expected to take over four years.
Taking a thousand dollar haircut in salary over four years is $48k, nearly half of the potential equity payout, but guaranteed if you took it as salary.
This comes across as super-negative, but that’s not how I feel. It is definitely good to have some personal stake in any business, both for employee and employer. But… be aware of the numbers before you agree to a trade.
It’s also perfectly fine, to take a pay cut to do work you want to do, or to work with people you love or to learn. All I advise is to know why it is you are taking the pay cut in exchange for equity.
Late employees (post multi-million raise)
My personal take is simple. Do not consider equity as a part of your renumeration, treat it like a bonus.
If the startup has multiple rounds of funding, and is still not profitable there’s a good chance of the value of your equity being nil. The money, however large, will run out.
If the startup is profitable, it’s actually a small-to-medium business and you should treat any stock awards or benefits as you would in a large blue chip.
The best time to negotiate salary is before you sign, just like in a large company.
Small companies are even worse than large companies at offering pay increases. Pre-revenue startups even more so. Not necessarily through malice, more through disorganisation.
It is important to have a rough idea of the scale of the business before you can judge the value of any equity. It is okay to ask for rough figures at interview: at least give yourself a ballpark.
It is also worth asking what the founders plans really are for the business. How big could the business be? What are the likely exit plans for the founders?
Hoping that other people will look out for you, if they aren’t related or married to you is possible, but mostly unlikely, in a work context. So be smart.
Make sure you know the maths of your salary vs equity and most importantly: know why you are signing up.
Last updated on September 11th, 2012 by @andycroll