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Key point to take away from this is: Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs. Th

Key point to take away from this is: Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs. The market has driven up salaries ridiculously high.

littletimmy 12y ago
That's one way of looking at it. The other way of looking at it is that the tech sector is one of the most profitable sectors in the US economy that rakes in millions per developer. The salaries are high because they should be: the companies are raking in record profits, why shouldn't the employees see some action?
- x0x0 12y ago
  Not to mention that, now that decent 1 bedrooms in commute friendly areas of the city cost $3500, the first $70k [1] of salary is a straight passthrough to the landlord. [1] at a 40% tax rate, 3.5k/0.6 * 12 = 70k
- peteretep 12y ago
  If that was true, salaries would be high everywhere. They're high in SF because of competition for workers, and because of the high cost of living. Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
  - frostmatthew 12y ago
    Unfortunately not many companies are willing to consider that - even Slack[1] isn't interested in remote workers. [1] https://twitter.com/mrmrs_/status/567832899854065664 https://twitter.com/mrmrs_/status/567832899854065664
    - peteretep 12y ago
      Something that works really well in London, and might work well in big urban areas, is partial WFH. If someone can work at home 50% of the time, they can live 5 hours away and just come in on a Tues morning, leave on Thurs eve, or are willing to put up with a 2 hour commute as they only do it half the time. I managed a mid-sized tech team at a company that did this, and it gave us access to many many candidates who didn't want to live in London, but lived as far away as Edinburgh...
  - walshemj 12y ago
    but for start-ups remote workers are in 99% of the cases much worse than collocated ones - If your a big company and you need some one to do basic CRUD work that can be well defined remote works better. To many people want to have their cake and eat it
- Iftheshoefits 12y ago
  Why ever is your comment being downvoted? It's the plain truth. Wages aren't ridiculously high in SV--they're ridiculously low, just like share of equity is.
sheepmullet 12y ago
"The market has driven up salaries ridiculously high." Has it really? My dad owned his first home freehold after working for 5 years. I'm almost there after ~15 years. And I've had help from my wife. Real estate has driven up salaries ridiculously high.
- walshemj 12y ago
  Compared to what? What do Dr and Lawyers get in SF
- franklinho 12y ago
  I meant in terms of startup costs. The increase in office space prices are a tiny fraction compared to the salary increases.
  - sheepmullet 12y ago
    And the salary increases are driven by real estate prices. I'm currently on ~$120k/year and I calculated that I would need $200k/year in the valley in order to have an equivalent lifestyle! I'm not going to uproot my entire family for an equivalent lifestyle so realistically I wouldn't move for less than $240k/year. I'm not saying I'm worth that kind of money; I'm just saying it's not worthwhile for me to work in the valley for less.
applecore 12y ago
It's all driven by real estate: residential, not commercial. Salaries are higher because people need to spend so much of their income on housing, and living in a high-cost area like San Francisco requires a higher income level.
_random_ 12y ago
Well, how about sharing some equity? Oh, I forgot you want to be a billionaire at the expense of early hires.
yourapostasy 12y ago
Please clarify your assertion. Are you saying real estate price increases have contributed 5% of employee costs, or (and this is what everyone else so far reacting to your assertion is interpreting) are you saying residential real estate is 5% of employee compensation costs? Increases in SF and SV area alone over the past 10 years, I can easily buy the 5% figure; could be even smaller. But see my comment further below on the where the bar is for companies to make major changes to capture small payroll savings. If you are describing an increase as a contributory factor, then you are obviously missing the time period that goes along with that increase you are talking about, so readers can go and look up the historical real estate pricing data. At 6-figure high-competency-developer total compensation package (and salary) levels in the US, you are looking at the 28% marginal tax bracket for the employee. High-wage employees like these developers will typically pencil out to 100-150% fully burdened to the company. For top 20 metro areas in the US, you will tend to see most such employees spend closer to 45-50% of gross pre-tax income on shelter costs (counting PITI plus maintenance), rather than the 33% that is the historical prudent personal financial planning guideline (and those guidelines should be taken with a grain of salt for reasons I won't get into here). With my CFO hat on, I look at the ratio of third-highest decile (with 50% pinned to the median) of PITI plus maintenance in the parts of the city I anticipate most such employees would prefer to live, to the total burdened cost per developer, to establish just how much the company is paying for shelter costs of its employees. It's a surprisingly large percentage for the top 10 metro areas, though everyone's specific numbers will be different based upon neighborhoods they choose, time period, etc. The ratio of course goes up as you travel down the skill (and payroll cost) ladder. Even with highly-compensated and -skilled employees towards the higher end of the skill ladder, I was coming up with ratios closer to 10% than 5%. I've seen companies move mountains to capture far, far smaller payroll savings percentages. What is much more difficult to quantify however, are the soft benefits of ready access to the large, concentrated ecosystem that grew up around the industry in that geographic area. Clearly, many companies today consider those soft benefits worth the incurred hard total compensation package costs. It's a calculation that you and your advisors should make and continually revisit once in awhile for your venture's own individual circumstances. For some smaller outfits who already have an assembled team and are in their early development stage, it is arguable that those soft benefits do not outweigh the immediate cash flow benefits of avoiding the high cost of living areas.

littletimmy 12y ago

That's one way of looking at it. The other way of looking at it is that the tech sector is one of the most profitable sectors in the US economy that rakes in millions per developer. The salaries are high because they should be: the companies are raking in record profits, why shouldn't the employees see some action?

x0x0 12y ago
Not to mention that, now that decent 1 bedrooms in commute friendly areas of the city cost $3500, the first $70k [1] of salary is a straight passthrough to the landlord. [1] at a 40% tax rate, 3.5k/0.6 * 12 = 70k
peteretep 12y ago
If that was true, salaries would be high everywhere. They're high in SF because of competition for workers, and because of the high cost of living. Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
- frostmatthew 12y ago
  Unfortunately not many companies are willing to consider that - even Slack[1] isn't interested in remote workers. [1] https://twitter.com/mrmrs_/status/567832899854065664 https://twitter.com/mrmrs_/status/567832899854065664
  - peteretep 12y ago
    Something that works really well in London, and might work well in big urban areas, is partial WFH. If someone can work at home 50% of the time, they can live 5 hours away and just come in on a Tues morning, leave on Thurs eve, or are willing to put up with a 2 hour commute as they only do it half the time. I managed a mid-sized tech team at a company that did this, and it gave us access to many many candidates who didn't want to live in London, but lived as far away as Edinburgh...
- walshemj 12y ago
  but for start-ups remote workers are in 99% of the cases much worse than collocated ones - If your a big company and you need some one to do basic CRUD work that can be well defined remote works better. To many people want to have their cake and eat it
Iftheshoefits 12y ago
Why ever is your comment being downvoted? It's the plain truth. Wages aren't ridiculously high in SV--they're ridiculously low, just like share of equity is.

sheepmullet 12y ago

"The market has driven up salaries ridiculously high." Has it really? My dad owned his first home freehold after working for 5 years. I'm almost there after ~15 years. And I've had help from my wife. Real estate has driven up salaries ridiculously high.

walshemj 12y ago
Compared to what? What do Dr and Lawyers get in SF
franklinho 12y ago
I meant in terms of startup costs. The increase in office space prices are a tiny fraction compared to the salary increases.
- sheepmullet 12y ago
  And the salary increases are driven by real estate prices. I'm currently on ~$120k/year and I calculated that I would need $200k/year in the valley in order to have an equivalent lifestyle! I'm not going to uproot my entire family for an equivalent lifestyle so realistically I wouldn't move for less than $240k/year. I'm not saying I'm worth that kind of money; I'm just saying it's not worthwhile for me to work in the valley for less.

applecore 12y ago

It's all driven by real estate: residential, not commercial. Salaries are higher because people need to spend so much of their income on housing, and living in a high-cost area like San Francisco requires a higher income level.

_random_ 12y ago

Well, how about sharing some equity? Oh, I forgot you want to be a billionaire at the expense of early hires.

yourapostasy 12y ago

Please clarify your assertion. Are you saying real estate price increases have contributed 5% of employee costs, or (and this is what everyone else so far reacting to your assertion is interpreting) are you saying residential real estate is 5% of employee compensation costs? Increases in SF and SV area alone over the past 10 years, I can easily buy the 5% figure; could be even smaller. But see my comment further below on the where the bar is for companies to make major changes to capture small payroll savings. If you are describing an increase as a contributory factor, then you are obviously missing the time period that goes along with that increase you are talking about, so readers can go and look up the historical real estate pricing data. At 6-figure high-competency-developer total compensation package (and salary) levels in the US, you are looking at the 28% marginal tax bracket for the employee. High-wage employees like these developers will typically pencil out to 100-150% fully burdened to the company. For top 20 metro areas in the US, you will tend to see most such employees spend closer to 45-50% of gross pre-tax income on shelter costs (counting PITI plus maintenance), rather than the 33% that is the historical prudent personal financial planning guideline (and those guidelines should be taken with a grain of salt for reasons I won't get into here). With my CFO hat on, I look at the ratio of third-highest decile (with 50% pinned to the median) of PITI plus maintenance in the parts of the city I anticipate most such employees would prefer to live, to the total burdened cost per developer, to establish just how much the company is paying for shelter costs of its employees. It's a surprisingly large percentage for the top 10 metro areas, though everyone's specific numbers will be different based upon neighborhoods they choose, time period, etc. The ratio of course goes up as you travel down the skill (and payroll cost) ladder. Even with highly-compensated and -skilled employees towards the higher end of the skill ladder, I was coming up with ratios closer to 10% than 5%. I've seen companies move mountains to capture far, far smaller payroll savings percentages. What is much more difficult to quantify however, are the soft benefits of ready access to the large, concentrated ecosystem that grew up around the industry in that geographic area. Clearly, many companies today consider those soft benefits worth the incurred hard total compensation package costs. It's a calculation that you and your advisors should make and continually revisit once in awhile for your venture's own individual circumstances. For some smaller outfits who already have an assembled team and are in their early development stage, it is arguable that those soft benefits do not outweigh the immediate cash flow benefits of avoiding the high cost of living areas.