One of the toughest questions I get about startup happens to also be one that I get the most often: How much of a pay cut should I expect to go to work for a startup?
I got that very question again last week, from someone I had just met. I could tell within a few minutes of meeting her that she was sharp. She had the talent, she had the drive, and she had enough sense to be asking the right questions.
It wasn’t her fault that this particular question has no right answer. She just didn’t know that there was no right answer. A lot of people don’t know that there is no right answer to that question.
So of course I’m going to answer it.
Note that this answer also works for: How Much Should I Pay People to Come Work At My Startup?
In one sense, startups are just like any other company out there. They pay what they can for the talent they need. But in most cases, startups don’t have the means to be able to offer a cash package that’s going to be competitive with larger companies. So they offset this gap with equity.
There is no standard calculation for how this plays out, but there are a few rules of thumb.
First of all, I’m a big believer that if you want to start a company, you should expect to pay close to market rate for talent. There is no magic startup discount. If you don’t have the cash, or if you have to give away a disproportionate amount of equity to bring in your first round of talent, you’re not ready to hire yet.
Of course, the earlier the company is in its lifecycle, the less likely it is that they’ll be able to pay a competitive salary. Established previously successful founders are going to have an easier time with this, because they’re going to have better connections to investors, or already have customers and revenue in the pipeline, or are possibly seeding the company themselves.
Just remember, the money to pay your salary has to come from somewhere. The only math the founders are doing here is how long they can keep a runway open while bringing on as much help as possible in order to get to cash flow break even.
Trust me, they are not looking at the industry leader in the industry they’re trying to disrupt and thinking, “Well, we can get away with paying 60% because we’re a startup and we’re cool.” Again, there is no magic.
And on the employee side, in the debate of money vs. cool, I will take money 10 times out of 10. If you’re being sold cool and it isn’t a cofounder discussion, walk away.
If the company is early, the equity being handed out will be larger, but keep in mind that this should only be for key hires. The founders need to retain control of the company, keep a pool of shares liquid to hand to out to other key employees, and keep another pool of shares available to sell to investors.
Note that I said “sell” in that last sentence. On purpose.
Now, let me dampen your dreams here a bit. This equity is worth slightly less than whatever paper the options agreement is printed on. It’s extremely hard to do the math, especially at early stages, because the company shares will be diluted over time when they’re sold to investors.
On the traditional VC route, it’s standard for a company to raise an initial seed round and then several infusions knows as series, from a Series A to Series X, with the valuation of the company changing, hopefully growing at a sane pace, along the way.
So again, do the math. In order for the startup to remain viable along its growth path, we’re talking just fractions of percents available per hire, usually anywhere from 0.5% to maybe 2%. And when I typed “2%” just now I was like, “Man, that’s a little high.”
Plus, you’re not getting a percentage, you’re getting a number of options (look up how that works, that’s not my bag). You should always be made aware of the number of outstanding shares from which your chunk is being cut.
If they won’t tell you that, it’s less than you should be getting. Walk away.
Yes, it’s riskier to go to work for a startup than an established company.
In the beginning.
Early on, a startup can go under easily. But that depends on your definition of early. A startup without a revenue path should not be hiring, as it’s still in the experimentation phase. A startup without revenue should also not be hiring, but may be doling out larger chunks of equity to bring in key talent. There is HUGE risk here, and that disclaimer should be made to you up front.
If it isn’t, walk away.
You can see all kinds of signs of how much risk you’re taking on during the hiring discussion itself. If the founders are for real, they’ll be very careful about how much money and equity they’re offering you, but they’ll also be very flexible in how your financial success can align with the startup’s success.
Can they explain exactly how your talents will impact their bottom line?
Can you get a contract with incentives at revenue milestones?
Do they have a plan to hit those revenue milestones?
How many backup plans do they have in case they don’t?
Now, if they can’t answer these questions or you’re not hearing answers you like, I’m not saying walk away. This is just how you gauge the risk you’re taking on.
Oh, here’s the main reason startups are less risky overall: I don’t care how many years to get to push spreadsheets and powerpoints at an established company for a living wage before you get laid off. You end up with nothing left but a job search and no increase in your personal value.
Hey, where did this one come from?
I’ve always said, from the very beginning of my career and in everything I’ve written: You don’t do startup to get rich. You do startup to love your life.
I’ve always — let me repeat that word — ALWAYS — taken a pay cut to go to work for a startup. I’ve always worked for a reduced or no salary when I’ve started my own company. Over my career, I’ve more than made it up on the back end, but I realize some people don’t. And the reason I’m still doing startup is because I love it.
You should never starve, but ask yourself if this opportunity is going to make you a better person at the end of the ride — not just in financial terms or even career terms, but in growth terms.
Are you going to do something awesome with your name attached to it?
If you can answer that question, then YOU decide how much you want to sacrifice to fire that rocket.
If you can’t, then walk away. This wasn’t your time.
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