
Joining a startup: high salary, no equity OR "startup salary" with equity? - corywatilo
http://watilo.com/joining-a-startup-high-salary-no-equity-or-st
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benjaminwootton
I would absolutely love to work for a startup as an early engineering hire.
I'd take an enormous pay cut for the right firm, people, and product.

However, for 1%, 2%, 3%, or even an unheard of 10% equity, it's just simply
not worth it when it's so cheap and easy to start something myself or find a
co-founder.

It's odd that I follow Hacker News and lap up everything startup and YC
related, but I wouldn't even click on one of the YC job postings as the
prospect of this kind of deal does not appeal in the slightest.

Joining say 3 co-founders with 33% each against my 1% as the first senior
engineering hire would really stick in the throat unless they had monster
traction or funding [in which case they'd already probably be bigger then 3].

I just do not understand who takes these roles with very early stage startups
as the entrepreneurial 'rockstars' that they are asking for can easily have a
go themselves with not much less chance of success, pretty limited downside if
it fails, and high opportunity costs either way.

For that reason, if I went to work for a very early stage startup, I'd want a
much, much, much higher salary than I could get in the market at a big
company. This would be to compensate me for the additional risk, the
additional workloads, plus the fact that I would be helping them add outsized
value in terms of building the company for them.

~~~
emmett
If they're not paying you and you accept <10% equity, you're getting ripped
off.[1]

But if they've raised money and you're drawing a salary? The startup is
massively de-risked. You should accept far less equity. You take on virtually
none of the downside risk and still participate in the upside risk.

As an employee, the situation you want to avoid is the quick flip. Do the case
analysis:

Failure: better to be a first employee than a founder. You should be better
paid, and your 3% of $0 is the same as 50% of 0.

Quick flip (aka HR acquisition): Founders make out much better than first
employees, since they'll typically be granted large retention bonuses. Best
case you get a free option on a job at the acquirer which probably comes with
a reasonably good bonus structure for the first few years.

Acquisition for value: Everyone gets rich. Founders get very rich, first
employee gets much richer than he possibly could have working any normal job.

Don't work for people who want to flip their company to Google in 6 months.
Work for people who want to change the world.

[1] Unless you've co-founded it with like, Steve Jobs. In which case you
should probably take 1% if that's the offer. Also, you are probably a
necromancer.

~~~
jobu
"Don't work for people who want to flip their company to Google in 6 months.
Work for people who want to change the world."

That's a great point. I really think any entrepreneur looking for a quick out
is another sign of an (un)intentional scam artist.

~~~
rmATinnovafy
You make a very good point.

Is someone who is doing a startup in hopes of hitting the startup lottery
(when you get bought out) a scam artist?

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ChuckMcM
Interesting conversation. The answer is actually much simpler. "Never work for
a salary that you can't live on." which is to say that if you are an employee
of a startup you should first make sure that you can live day to day on your
compensation before you talk about equity. Remember that compensation consists
of salary, benefits, and vacation time. They all contribute.

Once you have that out of the way, you can think about 'extra'.

Getting the 'extra' as equity has the highest _potential_ return and the
lowest _probable_ return. Which is to say that if the startup has an exit that
involves the common stock you could potentially get millions of dollars.
However startups are startups because they are as yet unproven businesses.
Their chance of failure is high early on and it goes down in proportion to
revenue.

What that means is that when a startup is later stage, has a product and some
revenue, its less likely to fail than when it first starts and before it has a
product or revenue.

So generally you can split startups into fairly large risk baskets.

Basket 1: pre-product / post-product

Startups that are pre-product are the highest risk, and the getting 'extra' as
equity here is something of a sucker's bet. The company has yet to prove they
can even _build_ what it is they want to build, much less sell it or get
users.

Basket 2 (post-product): pre-revenue / post-revenue

Startups that have a product can be spit into those that have convinced a
customer to pay them money for their product and those that haven't. The sad
truth is that some products cannot be sold profitably or at all. So the next
big 'milestone' is that there is revenue coming in from customers who are
using/buying the product. Pre-revenue is higher risk, post revenue lower risk.

Basket 3 (post-product, post-revenue): Traction / No Traction

The third split is the traction/no-traction split. If a startup has customers
and revenue, they have crossed the 'big' hurdles, but to grow they need more
customers. That is where traction comes into play. Is the startup getting new
customers? What is it costing to get them? Do those costs outweigh the revenue
they generate?

If your startup is post-product, post-revenue, and has traction _always_ take
equity. It is going to pay back better than salary.

~~~
tikhonj
I think your answer is perfect: make sure you're making enough not to worry
about money unduly and then pick whichever one seems more fun. I find worrying
too much about getting the highest expected return just isn't worth it, at
least to me.

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beagle3
First, it depends on your risk aversion. If you have kids to support, you
usually can't afford take as much risk - so the "startup salary" might not
even be an option.

But assuming you can afford the risk: Make a guesstimate about the expected
value of an exit, add some risk premium, and compare. e.g.

If you assume $1B exit with prob. 3% (and no other outcomes), the expected
value of the company is $30M. If you are offered 2% of the company over 4
years, that amounts to $600K or $150K/year at most (probably less, given tax
considerations, exercise price, etc -- but let's assume the maximum).

Now the risk premium: you can be fired at any point, you are 97% likely to
only be left with salary, and there's the opportunity cost (if something good
comes your way, you'll have to choose and essentially forgo the equity).
Altogether in my book, that's a 75% risk premium. It's down to ~$40K/year for
the equity value.

So, in this case, I'd value e.g. $120K "no equity" with $80K "with equity".

Now, if you think the company is going to top out at $100M at 3%, I'd value
$120K "no equity" as $116K "with equity".

When you look at it this way, it is clear that in the vast majority of cases,
you should treat options/RSUs as lottery tickets or potential bonuses, but not
much more.

Unless you happened to be an early Microsoft, Google or Facebook employee
(what's the probability of that?), you're almost surely better off with high
salary.

~~~
aamar
This is a good comment because it steps through the math. People seem to go to
amazing lengths to avoid doing back-of-the-envelope calculations of this sort.
Thank you.

I will say that "3% of $100M (and no other outcomes)" would be an extremely
pessimistic assessment of a startup, a so-called "risky double."

~~~
beagle3
> I will say that "3% of $100M (and no other outcomes)" would be an extremely
> pessimistic assessment of a startup, a so-called "risky double."

It's a way to get people to think of expected value. I Could have instead said
"$3M expected value". Would you say it's pessimistic to assume that's what a
startup will eventually bring in (as cash) to shareholders?

I think it might even be optimistic. There are thousands of 3-people startups
that fold giving out $0.

~~~
aamar
Point well taken. Maybe $3M is a good default value for a "credible" startup
nowadays or maybe it's a bit high. Depending on the particular risk factors
and assets the startup has (team track records, market, etc.), it could be
either a low or a high estimate. The important thing, I think, is that people
do that analysis.

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bradleyland
This seems like a really clever social hack, but I'm not sure it holds true.
It certainly stands to reason that people are more willing to give away the
things they don't value, but does it really make any sense that a founders
willingness to share equity is automatically an indicator of success
probability?

I tend to favor sharing of equity, because I want commitment from my core team
members. It's not that I don't value equity in my company. I do. I value it in
the higest regard, which is why I don't offer it to any stragler who comes
along. You can rest assured that if I do offer you equity in my venture, I
hold you in high regard.

It's very hard to tell if you want to be in business with someone. I'm
fortunate to have had an opportunity to work with some of my co-founders in a
normal business relationship prior to becoming co-founders. Had I not had that
experience, I'm not sure how I'd evaluate that decision, but I can tell you it
wouldn't be based on whether I was offered a high-salary or stock options.

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snorkel
high salary.

Even if the startup is positioned well with deep pocketed investors you won't
be able to cash out the equity for at least 8 years (a typical time span from
launch to IPO or buyout for a successful startup) assuming you still work
there (or you quit and purchase your vested options with your own money) ...
and the odds of any given startup reaching a miletone where the equity is
worth selling is small.

~~~
wpietri
FYI, median time to exit for VC-backed companies is down in the 4-5 year time
range:

[http://www.dowjones.com/pressroom/releases/2011/04012011-VCE...](http://www.dowjones.com/pressroom/releases/2011/04012011-VCExits-0124.asp)

A few years back the median was more like 7.

~~~
Drbble
I would estimate that the exits that are sooner tend to be smaller.

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kadabra9
I think you also need to look at where YOU are in your career, relative to
other opportunities. Out of school, I took some positions with low salaries
and some (now worthless) equity at startups becuase I was fresh out of school,
had low living costs, and saw it as a good opportunity to build a diverse
skill set that would help me further along in my career. Additionally, the
economy was just starting to tank so it wasn't exactly like there was a
plethora of good positions available anyways.

Looking back on it, it's easy to say that I made a "bad" decision (e.g I
should have seen the writing on the wall and realized these startups were
going to tank), but I'd probably do the same thing over again, for a few
reasons. Although the startups ultimately failed, I was still paid enough to
have my own apartment, cover my expenses, etc. On top of that, the "jack of
all trades" role I took on in these startups allowed me to pick up a lot of
other skills (sysadmin, design, etc) that I wouldn't have been exposed to had
I been paid market and chose to go the corporate path. I also made some
invaluable connections that I still rely on and am in contact with to this
day.

Now that I have a few years more of experience working at both startups and
nonstartups, it's a much tougher decision overall. As tferris pointed out, the
opportunity cost of giving up a portion of salary for a tiny slice of equity
is much higher as an experienced developer with a broad skill set.
Interestingly enough, working at a startup in my earlier years out of school
played a vital role in acquiring that skillset. So, you really need to other
factors like the founding team, traction, market, etc when considering a
startup as well as both where you're at and where you're trying to go in your
career.

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lsc
The article's thesis seems to be that you can predict the future success of a
company by how willing they are to hand out equity.

The big thing, though, to remember when negotiating with professionals? they
are professionals. Their only job is to profit from information asymmetry.
It's probably a mistake to think that you are better at the information
asymmetry game than they are.

just as a real-world data point: I have been very, very stingy when it comes
to giving out ownership in prgmr.com. While this /does/ signal a long-term
commitment from me, it really has more to do with the fact that I don't have a
clear 'exit strategy' than anything else- prgmr.com is not a 'get big fast or
die' kind of company. I very well might be running this business until I
retire, and, well, you probably will have moved on by then.

I'm talking about partnering with some other people on other ventures with a
shorter timeframe, and for that? sure, I'm happy to share.

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j45
If the CEO has been a success before at a level you want to be: consider
equity.

If there's no track record, the equity isn't worth the paper it's printed on.

You'll come out ahead with the high salary until you are really on an all star
team with a track record.

~~~
capsule_toy
Be careful with this. If the founders already had a successful exit and are
already set financially for life, they'll be more willing to turn down life-
changing amounts of money at the shot of an even bigger payout.

~~~
j45
This is a totally insightful and important point. If the founders aren't
working every bit as hard (or smart), if not harder, than the rest of the
team; RUN.

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beagle3
A very important aspect that people usually overlook in these cases is the
exercise price (in case of options), or immediate tax consequences (in the
case of an RSU 83(b) election). If the question is relevant to you, CONSULT
SOMEONE WHO'S PROFESSIONALLY DOING THIS STUFF, or at the very least, make sure
you read a lot about it.

Generally speaking, the equity you receive (in whatever form) will effectively
only reflect _increases_ to the company valuation.

In the case of options, if you get 1% of a $100M-valued company, it is worth
$0 if the company value stays <=$100M, and will only be worth $1M if the
company value increases to $200M.

In the case of RSUs, if you get 1% of a $100M-valued company, you are taxed as
if you were just gifted $1M (pay 35% to Uncle sam today, and a few more % to
uncle state as well), although you can't do anything with it, and if you
forfeit it (because you're fired or quit or the company folds) you can't get
the tax back. However, if the company does get to $200M valuation, and you
manage to sell your equity, you'll get $2M in proceeds and only be taxed on
the $1M increase this time.

~~~
gergles
That understanding of RSU taxation is _completely_ inaccurate, so I would
agree with your advice to consult with a professional beforehand, rather than
"read a lot about it".

~~~
beagle3
Other than stating that you're smarter, could you point to a factual error in
my numbers?

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phamilton
High enough salary to make life comfortable.

Enough equity to give you a sense of urgency and personal investment in the
success of the company.

Your personal 5 year plan should treat those options as worthless. If the
salary doesn't mesh with that 5 year plan, then it's too low.

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rwhitman
If someone asks you to trade a significant part of your salary for equity,
you're effectively investing in their company.

If someone asks you to invest in their company, approach it the same way as if
they were asking you for cash - do your due diligence and ask lots of
questions. I can't stress this enough - do your homework. Don't make
assumptions that just because the founders are successful people that the
company will be successful either.

Evaluate the same things a VC would look at - how does the founding team fit,
what is the revenue model, burn rate, marketing strategy, who do they plan on
staffing, what kind of investment do they have already, plans for raising
another round etc. Don't be shy with these questions - the founders want you
to trust them and be a part of the team and you have a right to know the
answers.

Basically don't base your decision on a gut feeling and some ad hoc criteria,
think like an investor before you invest.

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tferris
Hard question. A rational decision would lead to high salary w/o equity:

\- Probability that startup fails > 95%

\- You will get usually about 0,5-2% vested over 3 to 4 years with a cliff,
you'd get more if you joined _before_ a funding and took the entire risk and
had no salary for some time

=> So working at least 3yrs for max 2% (rather 1%) with an exit probability of
less than 5% yields too high opportunity costs; as a talented developer you
could miss many other opportunities

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carterschonwald
I've come to realize that equity is really just a proxy payment for the risk
that the company will not continue to exist / how much influence and impact
you may have on the continued existence and success of the company.

Likewise, the salary offer is about the combination of your negotiation
skills, expected marginal utility of your work, and the current state of the
company

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djb_hackernews
Think the general rule is maximize salary always. Next ask yourself if you'll
be in a decision making role. If you aren't then skip the equity. If you are,
then use this as leverage for more equity.

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throwaway52212
This is perfect timing. Can someone offer me advice? I'm young.

I'm in the process of negotiating to join a biotech startup in the Bay Area. I
am a graduating undergraduate student, and interned with the startup team
previously when they were working in research at BigCo. They left, licensed
their own hardware patents from BigCo, and are starting up. They are asked me
to join them in return for housing reimbursement, a meager living allowance,
and an uncertain amount of equity.

I know it depends on how much risk I am willing to shoulder, but what would be
reasonable terms for salary and equity, considering I'm a fresh grad?

They would bring me on as an early engineering hire, and they are currently
bootstrapping from savings while working on the product and courting angels.
Series A would certainly be far off. The founders have solid connections, and
have brought in an experienced woman to act as CEO/advisor until they have
funding. She was previously the CEO of a well-regarded company in the same
space.

The equity would be in the form of RSU, and salary would increase after angel
funding, and to market rate later on or with Series A. The personalities of
the founders are great, and I believe in the product.

I don't have an employment history, but I interned at well-known research
institutions each summer, later at BigCo, and attended (private) school on a
full merit scholarship. My skill set extends beyond software to several other
areas (that would, if mentioned, make it possible to identify me). I'm wet
behind the ears, but capable.

I also have a regular "corporate" offer elsewhere, at a salary comparable to a
low-end Bay Area market salary.

~~~
tikhonj
Take my advice with a grain of salt because I'm still a student, but I'd join
the company. You don't really need large amounts of money just after
graduating, and besides, most people in other majors probably end up making
even less. On the other hand, working for a small startup would probably be
more interesting and exciting, especially if you like the founders. Then, if
it doesn't pan out, you would probably have no problem finding a job at a
bigger company for a sufficiently high salary. So maybe you'd make less money
overall in the event of a the biotech company's failure, but you'd still have
enough to not worry and a more interesting experience.

Also, your risk tolerance as a fresh grad is much higher than it will be in
the future. You (probably) don't have an expensive lifestyle or a family, and
you can live pretty cheaply yourself. So you have much less reason to be leery
of equity than somebody older and more established.

I personally think that the best time to work for a small startup is just
after graduating, and that it's definitely worth doing at some point in your
life. So I would go for it in your position.

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TomGullen
Depends on definition of high, and what the startup is (if I think it will
work). With no other info I go high salary every time though.

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binarycrusader
High salary. Most businesses fail.

Sure, they might win big, but you'll enjoy life a lot more and be less
stressed with a higher salary.

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mrtron
High salary 95 out of 100 times.

I look back on a "startup salary" with equity and wonder what the hell I was
thinking. They recently had a very small exit and after raising money and
screwing over early employees on options...high salary would have still been
ahead.

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jsolson
Here's a thought: high salary, no equity.

After one year, no raise, but 20% (or perhaps more) of your salary as equity
at the company's most recent valuation.

Would any startups consider taking this?

Would any other potential employees of startups consider it?

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paulhauggis
Most likely, the startup will go bust and you won't get anything. Even if it
doesn't, I don't think they can possibly give you enough (unless it's Facebook
or you are getting 50% of the company) which equates to months or years of
your life that you can't ever get back.

My solution? Salary only and I take the salary and fund my own startup.

~~~
eshvk
I wouldn't go so far as demanding only salary because it kind of implies that
you are certain that the startup _will go bust_ rather than _might go bust_.
However, I definitely prefer as competitive salary as possible; I don't know
about the rest of the country but working long hours in SF gets expensive
(apartments, eating out, laundry services etc).

~~~
tferris
Easy: Ask for too much salary and too much equity at the same time. When
negotiating compromise just on equity.

------
michaelochurch
High salary.

If you're actually a real partner (a concept that makes more sense in
lifestyle businesses than in VC-funded startups, where only founders and VC
implants end up being partners) then equity can make you rich. If you're the
35th person to hop onto the train, you're really just an employee and you're
better off with a decent paycheck. The options might pay off, but they won't
make you rich in most cases... so it's usually better to have a salary, which
might not make you rich either but gives you stability.

The #1 concern should be what you'll learn and what kind of role you'll have,
though. Unless we're talking about order-of-magnitude differences, or at least
orders of binary magnitude, that's more important than either.

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yashchandra
It depends on what the difference between high and startup salary is. Some
startups which are well funded are offering generous salaries to start with.
It is difficult to predict if a startup with be successful or not, but if you
really believe in the idea, are excited to join the startup because of the
problem they are solving, I suggest take a salary and some equity. If you are
not really excited about the startup's idea or their product and just want to
work there as a job, then take the _high_ salary

