13 ms·

Joining a startup: high salary, no equity OR "startup salary" with equity?

78 points by corywatilo 14y ago

phamilton 14y ago
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.
paulhauggis 14y ago
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 14y ago
  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 14y ago
    Easy: Ask for too much salary and too much equity at the same time. When negotiating compromise just on equity.
- corywatilo 14y ago
  I agree - that's how I tend to do it these days. Most startups fail (and I've taken enough of the crappy deals to find this on my own), so I've become a skeptic, usually doing a better job of analyzing their ideas and connections. I end up charging my full rate (which to me is more valuable than the gamble of equity) and then using it as capital for my own projects.
- paulhauggis 14y ago
  Another issue is that it makes you a slave to the company. You don't want to leave because you want that equity. It's almost like continuing to gamble at a casino hoping for that next big payout. A friend of mine wouldn't leave because he had equity..even when management sucked and it was a terrible place to work. The company didn't get their next round of VC funding and went out of business withing 8 months. My problem is that it's too easy for the management of these companies to drive the company into the ground with terrible ideas..and you, as a minor stake-holder have absolutely no power to stop it.
yashchandra 14y ago
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
tferris 14y ago
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
TomGullen 14y ago
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.
carterschonwald 14y ago
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
j45 14y ago
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.
- byoung2 14y ago
  If the CEO has been a success before at a level you want to be: consider equity This is an important point. I took a job at a startup where the founders have all been part of two 200M exits (1 IPO in the first internet boom and 1 acquisition in 2005). They all made out very well with their options (big house, small yacht, small plane kind of money). They definitely have the connections and the vision to repeat their success. They offered me 3 choices for compensation: high salary, low equity; low salary, high equity; medium salary, medium equity. I ran the numbers and figured based on previous exits that it would be more likely that the higher salary over 5 years would be a better payoff if the company doesn't have at least a 100M exit, and if we do have a much bigger exit, 2% vs 3% will just mean a smaller yacht and no plane.
- capsule_toy 14y ago
  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 14y ago
    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.
bradleyland 14y ago
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.
snorkel 14y ago
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 14y ago
  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-VCExits-0124.asp http://www.dowjones.com/pressroom/releases/2011/04012011-VCE... A few years back the median was more like 7.
  - Drbble 14y ago
    I would estimate that the exits that are sooner tend to be smaller.
kadabra9 14y ago
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.
benjaminwootton 14y ago
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.
- mattmanser 14y ago
  As a non-founder you don't get the 'oh shit, pay day, um, have I got the money' or the 'right, I've promised X, Y to A and B yesterday. Damn'. Or the 101 other little things and worries and anxieties you experience. I'm not saying it especially takes a lot more skill but the level of stress and responsibility of the first non-founder is considerably less than the founders and always will be. So there's that. You also shouldn't expect more pay than a big company, a startup can be a lot more fulfilling and that's what you go there for. You seem to know that from your first sentence but have put some strange mental barriers around taking the plunge. It's like the difference between doing extreme sports or going golfing. Both are past-times, just very different experiences that elicit different desires in different people. EDIT: No idea at all why this was d/ved, if you don't want other people's experiences on HN... d/v away
  - benjaminwootton 14y ago
ChuckMcM 14y ago
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 14y ago
  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.
djb_hackernews 14y ago
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.
lsc 14y ago
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.
beagle3 14y ago
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 14y ago
  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."
  - Drbble 14y ago
    Pessimistic is realistic. Most businesses fail.
  - beagle3 14y ago
    > 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.
beagle3 14y ago
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.
- Drbble 14y ago
  83b election and postponed exercise protect you from tax on forfeiture. They don't protect you from decrease in share value, though.
  - beagle3 14y ago
    My point is even deeper: People think "wow, options for 1% of the company. If the whole company is worth $1B, that's $10M!" but that's wrong - the options have an exercise price, which must be realistic at the time of grant. So if the company is already worth $100M, and at the time you can exercise is worth $110M, your 1% options are worth exactly $100K. And about 83b: it doesn't protect you from tax. It just locks in a specific value for tax purposes (but you have to pay the tax at that second). It's an artificial tax event, which may be in your favor if things work out well, but has immediate costs regardless.
- gergles 14y ago
  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".
mrtron 14y ago
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.
binarycrusader 14y ago
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.
michaelochurch 14y ago
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.
noespam 14y ago
I don't mind "startup salary" if I like the technologies and believe in the product and more importantly the people. I make half what I used to make in a corporate environment but I love what I do and the people are as and more talented than I. If I don't believe so much in the product or the people, then it's just another job. Equity is a non factor and the salary must be commensurate with my experience.
throwaway52212 14y ago
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 14y ago
  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.
rwhitman 14y ago
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.
jsolson 14y ago
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?

78 points by corywatilo 14y ago

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.

paulhauggis 14y ago

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 14y ago
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 14y ago
  Easy: Ask for too much salary and too much equity at the same time. When negotiating compromise just on equity.
corywatilo 14y ago
I agree - that's how I tend to do it these days. Most startups fail (and I've taken enough of the crappy deals to find this on my own), so I've become a skeptic, usually doing a better job of analyzing their ideas and connections. I end up charging my full rate (which to me is more valuable than the gamble of equity) and then using it as capital for my own projects.
paulhauggis 14y ago
Another issue is that it makes you a slave to the company. You don't want to leave because you want that equity. It's almost like continuing to gamble at a casino hoping for that next big payout. A friend of mine wouldn't leave because he had equity..even when management sucked and it was a terrible place to work. The company didn't get their next round of VC funding and went out of business withing 8 months. My problem is that it's too easy for the management of these companies to drive the company into the ground with terrible ideas..and you, as a minor stake-holder have absolutely no power to stop it.

yashchandra 14y ago

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

tferris 14y ago

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

TomGullen 14y ago

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.

carterschonwald 14y ago

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

j45 14y ago

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.

byoung2 14y ago
If the CEO has been a success before at a level you want to be: consider equity This is an important point. I took a job at a startup where the founders have all been part of two 200M exits (1 IPO in the first internet boom and 1 acquisition in 2005). They all made out very well with their options (big house, small yacht, small plane kind of money). They definitely have the connections and the vision to repeat their success. They offered me 3 choices for compensation: high salary, low equity; low salary, high equity; medium salary, medium equity. I ran the numbers and figured based on previous exits that it would be more likely that the higher salary over 5 years would be a better payoff if the company doesn't have at least a 100M exit, and if we do have a much bigger exit, 2% vs 3% will just mean a smaller yacht and no plane.
capsule_toy 14y ago
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 14y ago
  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.

bradleyland 14y ago

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.

snorkel 14y ago

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 14y ago
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-VCExits-0124.asp http://www.dowjones.com/pressroom/releases/2011/04012011-VCE... A few years back the median was more like 7.
- Drbble 14y ago
  I would estimate that the exits that are sooner tend to be smaller.

kadabra9 14y ago

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.

benjaminwootton 14y ago

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.

mattmanser 14y ago
As a non-founder you don't get the 'oh shit, pay day, um, have I got the money' or the 'right, I've promised X, Y to A and B yesterday. Damn'. Or the 101 other little things and worries and anxieties you experience. I'm not saying it especially takes a lot more skill but the level of stress and responsibility of the first non-founder is considerably less than the founders and always will be. So there's that. You also shouldn't expect more pay than a big company, a startup can be a lot more fulfilling and that's what you go there for. You seem to know that from your first sentence but have put some strange mental barriers around taking the plunge. It's like the difference between doing extreme sports or going golfing. Both are past-times, just very different experiences that elicit different desires in different people. EDIT: No idea at all why this was d/ved, if you don't want other people's experiences on HN... d/v away
- benjaminwootton 14y ago

ChuckMcM 14y ago

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 14y ago
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.

djb_hackernews 14y ago

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.

lsc 14y ago

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.

beagle3 14y ago

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 14y ago
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."
- Drbble 14y ago
  Pessimistic is realistic. Most businesses fail.
- beagle3 14y ago
  > 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.

beagle3 14y ago

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.

Drbble 14y ago
83b election and postponed exercise protect you from tax on forfeiture. They don't protect you from decrease in share value, though.
- beagle3 14y ago
  My point is even deeper: People think "wow, options for 1% of the company. If the whole company is worth $1B, that's $10M!" but that's wrong - the options have an exercise price, which must be realistic at the time of grant. So if the company is already worth $100M, and at the time you can exercise is worth $110M, your 1% options are worth exactly $100K. And about 83b: it doesn't protect you from tax. It just locks in a specific value for tax purposes (but you have to pay the tax at that second). It's an artificial tax event, which may be in your favor if things work out well, but has immediate costs regardless.
gergles 14y ago
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".

mrtron 14y ago

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.

binarycrusader 14y ago

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.

michaelochurch 14y ago

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.

noespam 14y ago

I don't mind "startup salary" if I like the technologies and believe in the product and more importantly the people. I make half what I used to make in a corporate environment but I love what I do and the people are as and more talented than I. If I don't believe so much in the product or the people, then it's just another job. Equity is a non factor and the salary must be commensurate with my experience.

throwaway52212 14y ago

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 14y ago
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.

rwhitman 14y ago

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.

jsolson 14y ago

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?