How should I calculate compensation between rounds? | Hacker News Reader

How should I calculate compensation between rounds?

1 pointanonengineerer1 comment

I'm an early employee (2) at a pre Series A startup. I've been there a year (joined after seed round) and have been doing fairly well in my role (driving a decent amount of measurable value for the company). The situation I've run into is that, in part because of our collective success, we've delayed raising our A until later this year. As a result of that, our founders have said that they won't be changing anyone's compensation until the A happens.

I totally understand not increasing salaries until the raise, but something one of the founders said sounded wrong to me. He said that my vesting schedule is effectively a raise for me because the company has become more valuable.

Before he said that, I had thought that my first year total compensation equation was:

salary_value + total_equity * company_valuation_last_year

If that's not the case, then last year my compensation was:

salary_value + 0.25 * total_equity * company_valuation_last_year

which is quite a bit lower than even some pure salary offers that I had. Perhaps this is a bit long-winded, but what's the right way to think about compensation at this stage? Should I be asking for additional equity based on both the fact that we haven't raised salaries yet and that my value has increased in the last year? Or am I missing the point entirely?

My guess on the equation would be that my first-year total cost to the company was $X and that this year, even if I didn't increase in value, they should provide additional equity along the equation:

(X - current_salary) / company_current_valuation

Compensation and equity are not the same, vesting over time is not equal to a raise (or "effectively a raise"). Compensation is what you were paid and what you were taxed on (typically) during the year. Equity is never compensation until/unless the company's shares are marketable, then it can count as compensation (kind of a general statement, there are nuances of course). I like to explain compensation this way, if you can deposit what the company gave you into a traditional bank then it is compensation, everything else is either a future promise or a potential liability.

I could write a ton on this, but let me say this. A company that delays their A is either knocking it out of the park so they don't need to take the dilution and see a path possibly of not raising an A, OR they have issues and are trying to figure it out. If they are doing so well, the company may delay their Series A but good founders will recognize they cannot delay taking care of employees just because they delayed the Series A. They may limit the number of increases and make them smaller than they originally planned, but they will take care of the employees that are making them successful, because if you lose those employees you lose momentum and possible the business if it is still only a few people.

Your founder is either just inexperienced and talking out his/her ass trying to justify their position or they are being deceitful for a reason. I'd always err on the side of a young founder being inexperienced over deceitful, but only someone involved can figure that out.

Equity is the bonus (lottery ticket) used to convince people to take a chance on an unknown company with unknown founders, it is not compensation initially. 98% (a number totally pulled out of my ass but based on my experiences) of the time equity will be worthless. That said, if things are still fun & worth it then you join and forget about the equity unless you fully vest and the company has an exit or the equity becomes marketable in another way (secondary market etc). Also, that doesn't mean you shouldn't try to get more equity as you go, especially if things are going well, extra grants is a way to help make it more of a real event for you in that rare 1-2% chance it works out. Also extra equity is the only way to offset the dilution each raise will bring you.

I have seen founders try to say your compensation is your (salary + (vested equity * current valuation)) or some variation of that. That is just a way to try and convince inexperienced people that they are being compensated fairly. No one has a clue what the valuation will be when the equity becomes marketable or at an exit, it may even be negative (liabilities > assets). You have no way of paying bills by telling the bank you own 1% of "ABC SaaS startup", no one is loaning you money against it etc. And even if someone did loan you money that way, that is still not compensation it is trading on your credit/reputation not the companies.

If you got paid $80k this year by the startup, that's your compensation, period. Only you can say whether you feel what is going on is fair. If it is fair and you like the place, stick it out, if it isn't be ready to find your next gig and use this experience to set yourself up differently next time.

BTW -- I am definitely not negative on startups, I just believe people should know the facts and likely outcomes so there isn't a misunderstanding or someone feeling taken advantage of at some point.

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