I recently read this fascinating thread on Twitter talking about navigating startup compensation and what you should expect when deciding on whether or not to take an offer. I wanted to summarize the thread here, but you can check out the original here.
What is startup compensation?
Depending on the stage of the startup you are looking to join, the difference between compensation you receive at a startup and a non-startup is that you will often have a lower salary but this will be made up with the amount of equity you get. The three parts that form this new compensation are salary, benefits, and equity. Let’s zoom in on these three parts quickly.
This will largely depend on the size of the startup, but you should expect to have a lower salary at a startup than at a larger company because you will be receiving more equity and part of working there is the expectation that the company will continue to grow (thus increasing the value of your equity.) That being said, you should use salary tools to make sure what you are getting is on par with other employees at your level. Levels.fyi, Glassdoor, or AngelList all have great tools to help with this research.
Oft overlooked, a smaller salary or equity with better benefits can be much more valuable than the alternative. That being said, startups tend to have different benefits than larger companies, because they don’t have as much money to spend. Whether the benefits benefit you is really dependent on what stage you are in your life and what is important to you for your work-life balance. What’s good to remember, however, is that as a startup grows they will usually reward employees with increased benefits, so if you are happy with the initial benefits, there is a great chance they will only get better!
Equity: Stock and Vesting Schedules
This is the most important (and most confusing) part of any startup compensation package. Equity refers to the amount of ownership you are given of the company and this is where the real value of working at a startup lies. When you are hired this equity might not offset the reduction in your salary, but if the company continues to grow it will likely more than make up for the deficit in the long run, especially if the company is acquired or goes public. You should familiarize yourself with how equity works and what the different stages of fundraising a startup go through here.
A very early-stage startup doesn’t have the capital to pay you a competitive salary so they will likely give you much more equity, but as the startup raises money and grows the amount of equity rewarded to each hire drastically decreases. As a rule of thumb, startups usually reserve 10% for early hires and 10% for everyone after that. While that is by no mean a guarantee, that gives you a good idea of the diminishing amounts being given out.
The other important aspect of equity is the vesting schedule that you receive. When you are hired you are never directly given all of your equity, but instead are given the option to purchase it on a vesting schedule. This rewards employees who stay around and disincentivizes employees from leaving early. The typical vesting schedule gives you one-fourth of your options at the end of your first year, and then 1/48th every month after that. Once your options vest, you have the right to purchase them (or not).
Where is the company going?
When deciding whether or not to take an offer, think about where the company is going. Much of the value you are receiving by working at a startup is in the future value of the company so you should try to understand how the company is growing and whether or not you will see an increase in value. You should also note that as the company grows it is very likely your salary will increase (you can sometimes request that your salary is increased when they raise capital.)
When you are negotiating your startup offer make sure you find some numbers to base your offer off of and have a range in mind. Also, consider the whole package of working at a startup. Beyond offering more equity, working at a startup is a totally different experience and is often faster-paced, and allows you to wear multiple hats. If this is something that really excites you then maybe a small pay cut is worth it!