So you’re a candidate on the market, and considering what company to call home next. You’ve probably had a variety of experiences throughout your career, each one a bit different than the last, and had your previous role been the perfect one for you, making a move right now might be an afterthought. But alas, we’re here now, and you’ve gotta decide what’s important to you. You know one thing for sure: you want to join a startup. You love the camaraderie, the cool new tech, and the fact that you get to contribute in a variety of different ways (often referred to as “wearing multiple hats”).
That’s the good news. Here’s the bad. Most startups are gonna be low on cash and look to distribute a fair bit of equity to attract top talent. That said, most top talent is weary of early-stage startup equity, mainly because stock options in 9 of 10 startups is, and will forever be, worthless. Now, while that may be true, I’m here to argue that there’s no reason to fear the worthless equity, because if you’re interviewing wisely, you’ll be able to land at least one offer from a startup whose equity actually has a shot at turning into dollars. But hey, it’s all speculation, especially at the interview stage. I’m not saying that you’ll choose the right startup to take equity with this time around, but I’m saying that choosing wisely each time you’re on the market – and if you’re a developer, you don’t need me to tell you, you’re on the market almost every 12 months (sometimes more) – you’ve got a shot at picking a winner.
Let’s do the math. Nine of ten startups will not make it to an exit or IPO, leaving us with a 10% success rate*. We’ve also got average startup salaries for software engineers floating around the $100k mark for 2-4 years of experience in major tech markets like NYC, SF and LA. If an engineer finds him/herself in a new job every 12-18 months (which has become the norm), then over the course of a candidate’s first 5 years in the startup space, they’ll have had 3-5 opportunities for an exit. Had they taken the equity stance in favor of market salaries, they may be asked to give up 5-10% of the cash up front (which by the way, often comes with the guarantee of a raise upon the company reaching certain fundraising goals, a huge factor many startup hires fail to consider when they receive an offer). Let’s also assume that salaries will increase by 10% with each additional year of experience. This means, by the time one of these engineers had reached his/her 10th startup, they might be 10-18 years into their careers. Big picture, that’s a long game approach, but with salaries already so high in this space, it’s the opinion of this blogger that one could do far worse than essentially foregoing his/her initial base salary in the early years of his/her career in favor of equity. Here are the numbers:
Market Salary over 10 positions = $1,753,116.71
Startup Salary over 10 positions = $1,577,805.04
Difference = $175,311.67
Avg. Difference per position = $17,531.17
Now, let’s talk about the value of the equity from those who do exit. Just as a reminder, the reason why we chose to include the first 10 potential startups a candidate would join is to demonstrate that only 1 in 10 is expected to exit, even though it’s very possible that if you’re a candidate that has selected his/her companies’ wisely, you could find yourself a winner in multiple startups. Based on data capturing exits via acquisition, sale from 2007-2014, the average startup raised $29.4M and $155.5M. We’re talking about a 7x return for initial investors (assuming 100% investor ownership, which we all know is never the case)**. Keep in mind, that does not even include the average !PO exits, which would’ve inflated these numbers dramatically.
So, what does this mean to me, the candidate with 3 years experience in SF with an offer of only $90k + equity to join a startup that’s raised $40M in through Series C? Well, it means you ought to hold your tongue about your below-market salary and look at the numbers. If the company courting you has put a nice chunk of stock options in front of you, I’d sign on the dotted line without putting up too much of a fuss. The $5-10k they’re withholding from you today will hopefully make it’s way back to your pockets 5-7x if the company has it’s sights set on an exit within 12-24 months. If they aren’t able to tell you about their trajectory, they might not be that serious about you. That’s a red flag in itself. Be cautious. You always want to be looking for the company that is transparent to the end. You’ll feel like the ownership they’re giving you is actually worth the risk.
I know that many of you reading this might have found yourselves in similar situations already, only to be defeated by the 4-year vest, or worse, the company folding or laying you off. Shit happens. That’s why I wrote this piece. You need to have the vision to see past the role in currently in. At the end of teh day, 9/10 startups will fail. Do the best you can with the ones you’re working with, take ownership of your work (for which you’ve been granted equity), and have a very short memory when it’s time to move on. You will win in the equity game if you’re willing to play it consistently if you’re selective when deciding on which offers to accept.
Millionaires aren’t made overnight. They certainly aren’t made by those who negotiate an extra $10k in salary. They’re made when you take financial ownership in the work you do for a company you believe in.
— Cody Sklar
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