Unless you're a founder, startups do not pay out
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blog.selfassembled.org
However, being an employee in an early stage startup is a great way to jumpstart your career, whether you have entrepreneurial aspirations or not. In an early stage startup you are going to be rubbing noses with investors, working on interesting/tough problems with very smart people, taking on huge amounts of responsibility, getting in way over your head every day, and generally beefing up your resume.
Think of it as an investment in yourself. You will build character, and you will build varied skills that will carry forward for the rest of your life, and someone has paid you for that privilege.
That's the thing about big companies... it doesn't matter if you are willing to work for less; they've got a budget and will hire the best person they can get for that budget. If you don't have the experience, and are willing to get paid less than what the job-role would normally pay to get the job? yeah, that's a pretty effective way to get experience, learn the job, and then switch companies and get paid full-rate for the job role a few years later. and yeah, you will probably need to do that at a small company (startup or otherwise) where the fact that you are willing to do the job role for half what someone with experience will want matters.
But yeah, I wouldn't really say you are working for below-market wages, 'cause you are presumably getting a reasonable wage for your level of experience (even if it's a low wage for the job role.)
I'm not saying one should never work at a startup. I'm just saying that startup offers shouldn't be judged any differently from any other job offer. There might be smart people at startup X, but there are plenty of smart people at Google or Facebook or what have you as well. Take the expected value of your options and your salary and compare it to any other offer. No special rules should ever be made for startups except in extremely rare circumstances. Investor connections that one might get from being an employee at a startup are often vastly overstated as well. If you want to be a founder yourself, you need to just go found something--working for another founder just isn't the optimal way to get there, especially with the extra time commitment that many startups involve, meaning you won't have time for your own side projects.
One of those rare exceptions I mentioned might be if you are asked to come on in a CTO or VP Engineering role for a new and emerging startup. This sort of experience can help you get executive positions later on at larger and more stable companies if that's the career path you want.
Edit: I want to clarify my final point a bit more. Titles matter a lot in early-stage startups. Almost by definition, VC-backed startups are going to undergo rapid expansion--and that means lots of hiring. And that means that unless you have a senior title from the beginning you face the real risk of simply having people hired over you rather than being promoted yourself. This is especially true if you are hired into a junior role in the beginning. All of this means you may not get your desired leadership role in the end at all if you're not careful.
Conde Nest is no longer growing rapidly which means... That the only way to move up is for people to quit or for you to out politic your coworkers.
Contrast that with a rapid growth company, lets say one that IPOs in 10 years, yeah, you get a payout, but you also should get a huge increase in salary and responsibility over those 10 years.
If you don't have a senior or executive level title from the beginning in an emerging startup, you face the real risk of simply having people hired over you rather than getting those increases in responsibility that you want. If you are VP of Engineering from the start, then the founders will struggle to hire too many people above you, if any, because they don't want to sacrifice the sanctity of that title. If you are brought on as a junior engineer, however, you can't count on getting the promotions you deserve.
Of course, not every startup is going to do this. I'm just mentioning it as it should be part of the decision making process. Joining a startup does not equate to guaranteed increases in responsibility and leadership.
Playing devil's advocate: for one early employee who kicks ass and is not rewarded with increased responsibilities, how many expect a VP title served on a silver platter in spite of their inexperience and/or inability to manage, and blame the company instead of themselves when that happens?
Speaking as a founder, when I see someone over-delivering and eager to do more, I sure as hell will double his ration of responsibilities, and then double it some more as long as he's willing and able. And yes, in a good company when responsibilities and value added to the company truly double, so does compensation.
Doubling their responsibilities isn't going to get them on the conference call with investors. It isn't going to get them in charge of a team, in most cases. Instead, in most cases, an experienced lead will be hired. Or the team will be sold/aquihired, and he'll end up a junior engineer in BigCo anyway.
So, why take a chance on a startup making below market rates, especially if it's not a clear winner?
Now, I operationalize "Startup" as an organization in search of a repeatable business model, as Steve Blank suggests. If instead, the great but junior developer is looking at a profitable, growing company, it may make sense to join at below market rates. That way, product/market fit has already been established and your work can directly be correlated to things that increase profitability.
But those are two different games.
I disagree with you in 3 ways:
* I didn't limit the scope to technical responsibilities. You did. I mean everything from product leadership, customer interactions, management, growth, etc. No shortage of interesting things to do in an early-stage startup if you're willing to get your hands dirty.
* You imply increased technical responsibilities are a bad thing. How can one think that and be an engineer? Being overwhelmed with maintenance may indicate other problems. Maybe your organization doesn't value gradual maintenance and has to pay it all at once. Maybe you're getting the shit maintenance work while others get the fun projects. Or maybe you have low tolerance for the unsexy but necessary work of maintaining your code.
* You present technical responsibilities and leadership as mutually exclusive. Leadership and management are not the same thing! As a technical lead you may not be anybody's boss, but in a good technical organization it should give you plenty of opportunities to show your worth while growing personally.
I think the mistake here is confusing career advancement with the number of people reporting to you. Startups don't work that way. The measuring stick for your trajectory should be 1) how much you get done and 2) how much recognition you get for it. How many people report to you is an implementation detail.
... If you've been kicking ass managing a small team, have made it clear that you're interested in a director position, and the company hires an outsider instead, maybe they're idiots and it's time to move to greener pastures. That's how smart companies find great first-time directors.
... If you're an engineer but want to try your hand as a first-time manager, and you're not given the opportunity, find a company willing to take the risk.
... And so on.
Early stage engineers do not usually work on interesting problems at a startup. You are hired to do the uninteresting stuff. A startup may or may not beef up your resume. It's still easier to get hired if you have Apple or Google or Facebook on your resume than a failed startup. You generally do not rub noses with investors, but you might be invited to an informal lunch if the company is still very small. You do take on a lot of responsibility and get in over your head. It's a good jumpstart to a career if you can't get a job at Google or Facebook or Palantir or Apple or Goldman Sachs.
[1] http://thenextweb.com/google/2010/09/14/one-half-of-one-perc...
However, a lot of startup is populated by people who change job once a year, they can be your network and it can grow really large.
And this is an optimistic, above-average outcome.
10% chance of the company selling for $10 million
This isn't just optimistic, this is a wild fever dream in a summer heat.
The "acqui-hire" exits seem to be around $50M; a really good case is $100M.
In that case, you have some chance of making $50K to $200K over 4 years or so, or $12.5 - $50K a year. If you say the chance is 10%, which is indeed wildly optimistic, then you come out to $1.25K to $5K a year, which is essentially negligible. It's nothing compared to a virtually guaranteed bonus at a large company.
So I'm not disagreeing with you, just providing what I think are more realistic numbers.
Outside of Silicon Valley, I've seen grants in the 10% range before, but such are either considered late founders or are C-level executives. I've also seen grants of 0.5-5% for senior engineers. I also know that kids straight out of school have seen good sized grants too, but those are for people with a proven ability. In other words offers given to former co-op students & interns.
For new grads, I recommend either doing their own startup, or join a large software corp.
I really think government should have a program to fund say 1 million startups, I'll do one myself :)
If you sold your equity the day after it was given to you, would it bring your salary up to a reasonable level? That's the benchmark. If not, ask for more equity, or more salary.
The competition for good people is fierce, there's no reason you need to accept low pay.
A 15% bonus + 401k match + ESPP + yearly stock grant can easily equal 40k+ for a junior (1-3 year exp) employee.
Founders, in essence, reject the pyramids of established companies and try to create their own (the new company) with themselves at the top.
This is why the myth of the startup was created by founders and investors--they need submissive employees to work at below market wages (initially) at the lower levels of the pyramid in order to support them at the pinnacle. Note that the purported benefits of working at a startup are always intangible and hard to quantify (read: things which don't cost the company any cash)--but the opportunity cost of working as an early employee at a startup is readily quantifiable and quite large: a huge loss in earning power in the short term, with only a lottery ticket's chance of winning in the long term.
This isn't to say early employees shouldn't be compensated fairly, they should. But you can't just be in it for the money. Being an early-stage employee is great for your personal development and puts you on a fast track to a C-level position should the company survive. You simply won't get that at BigCo.
You can't argue that employees get a salary and thus don't deserve as much reward, but simultaneously argue that even though founders get a salary, because it is below market rate they deserve more reward. Both parties are getting paid below market rate.
So yes, some founders will forego a salary (like us). Others won't. We pay ourselves when the company can afford to pay us, but we always pay our employees first.
I think its because in some of these cases the founder(s) persuade people to work for them at below market salaries by selling them a dream that seems to involve said employees "being in it together" with them, when the equity distribution says anything but.
I think if a startup is paying market rate or above, then the employees have no reason to feel like when the company sells or goes public that they should make out like bandits too.
That is, of course, unless you happen to work for the next Google. But let's be honest, you aren't working for the next Google. Doesn't matter who founded it or who's bankrolling it. You're not working for The Next Big Thing. Someone is, sure, but you're more likely to be struck by lightning than be that guy.
Say I'm granted 10 shares of options in a company (for the sake of the example, say this is 10% pre-dilution. So there are 100 shares currently). This vests over 4 years. Are you 'granted' these shares, or do you have to purchase them? Presumably, you purchase them at the 'strike' price? Is this something determined when you are hired and sign the employment contract? Or when the equity starts vesting?
In other words, if I'm getting this correctly, you have to pay to own a portion of the company, despite the fact that you're an early employee? Do the founders have to do the same? If the strike price is $1/share, then you have to pay out $10 to own that 10% over the course of 4 years? Or will the 'strike' price change over time?
If the company IPOs before you exercise your options, you generally won't have to provide the capital to purchase the shares, as any brokerage will be able to cover that for you (by subtracting it from the sale proceeds).
When you are granted stocked, it is taxed as income upon being granted. Since the stock is illiquid because the company is a startup, there is no way to sell it to pay the taxes, so granting stock just reduces your already meager salary.
You can usually exercise your options any time after they vest. However, most people don't and this is sometimes discouraged. If the company is sold for cash money, you may not ever formally exercise your options: the lawyers and the accountants will automatically exercise them for you, deduct the strike price from the sale price, and just deposit the net in your bank account.
Is there any real reason to exercise those stock options and hold onto common stock of a non-publicly traded company? I guess if there's enough demand, those stocks can be traded on 'secondary' private markets (like FB, pre-IPO), but I would imagine this to be the exception and not the rule, correct?
Clearly the best option is to not exercise those options until absolutely necessary, or am I missing something here?
The other reason to exercise early is also taxes. When you exercise the option, buy stock at $0.01, and sell it at $10 milliseconds later, that is a short term capital gain. If you exercise them years before selling them, you have long term capital gains, which are taxed at a lower rate. You increase your after-tax payout by (say) 10%, with the risk that your payout will be $0. Or less than the cost to exercise your shares. Or the opportunity cost (you can't use money tied up in illiquid startup stock to buy houses or APPL at $10) is too high.
When you step back, this is really inescapable: large, established companies are more stable and predictable than small, unproven companies. Accordingly, the forces of the market will provide the large/established companies with greater compensatory resources in exchange for that confidence and predictability (some way or another, we are all willing to pay extra for a guarantee, or as close to a guarantee as the market allows). There are exceptions, of course... but the general pattern is clear.
But indirectly, you raise an important point: many early stage employees (especially 'kids') do not fully understand how equity or funding works ... and they end up believing in the false idol of their basis points and wasting many years of their lives.
I've never met anyone working as early stage employee who had a get-rich-on-liquidation mindset and did not end up burnt out or extremely frustrated in the long run (my own experience very much included). To survive (even /enjoy/) early stage, you must build a personal satisfaction model that's more than just cash (learning? networking? friends? intellectual stimulation? fun?). It's very possible, but it's a huge shift in perspective if you're coming from a golden-handcuffing big tech co...
This part bugged me though:
"Lets put it this way. You're working at a start-up. You've got some decent stock, say, like, 200,000 options. You vest over four years and your strike is $1/share (which is WAY too high for an early employee, but you feel "good" about this one.) You're making 50k under market value."
Number of options and strike price are almost meaningless without context - specifically, number of shares outstanding + ESOP pool. PPS is derivative of the number of shares outstanding, and strike price will typically be the PPS at the last round of financing, so whether it's $1 or $10 or $0.10 is _completely_ determined by the valuation of the company divided by the number of shares outstanding.
The number of shares outstanding (+ those allocated to the ESOP) is the meaningful number here. 200k options could represent a significant stake in the company (up to 99.9995% of the company, for example, if the company has only a single share outstanding and no other options issued!) or an insignificant stake in the company (for example, if the company has 1 trillion shares outstanding).
The only thing the 200k options / $1 strike price tells you is that if the company doubles in value, you will have made $200k (less taxes & tip). Triples in value, $400k. Multiples by X, $200Xk.
If you don't think the company is going to double/triple/10X in value during your time there, don't play the game.
Edit: Plus you don't have to stick around for four years at a below market salary. If you're pulling your weight and the company gets traction, you should expect a reasonable salary (not $50K below market rate for four years in a row like the article implies).
What's galling is when someone ELSE makes big bucks off your hard work, and you don't. Then you often feel taken advantage of. That isn't generally happening when you take a smaller salary to become a teacher or a touring musician or to travel the world more.
And when it DOES happen (say, to touring musicians, sure), the person it happens to generally feels exploited. Even if they had done the same thing for the same money _without_ someone else profiting big time off their work, they would have felt good about it.
But if you decide you don't mind someone else trying to make huge bucks off your hard work, without sharing them with you, because you enjoy the thing you're working hard on that much and it's all cool... I guess I've got no reason to say there's anything wrong with that, if that's your thing.
But in reality, it's the difference between working at a startup with equity on the same order of magnitude as the founders, but the startup doesn't end up succeeding (Oh well, it was worth a shot, and I still made enough to pay rent and live comfortably, and I found it rewarding) vs working at a startup that is VERY succesful and the founders are rich... but you wound up with much less money than you could have had working somewhere else, perhaps with just as interesting work. How likely are you to find the latter one rewarding, after it shakes out?
> You've got some decent stock, say, like, 200,000 options. You vest over four years and your strike is $1/share
What startup is that? If it has a $1/share valuation its already near the end of its "start up" runway. And if your getting 200k in shares then its either really earl on or the strike price is really low. I have had offers from YC-Backed companies in the past and its one or the other, not both.
??
I can understand if a very large organization has so much organizational overhead you somehow work really long hours, but for a smaller team that shouldn't be a factor ... right?
On another note, the learnings, experience, and connections I gain in the startup compensate the low salary I'm getting. This is my first real job. And I think I'm getting a lot of knowledge in terms of technology and management side.
Here's my Fuck You Money Calculator:
In 99.9% of the situations where a non-founder gets 'FU Money' (B) will not be the case, and (A) is increasingly rare.
[1] http://www.startupcompanylawyer.com/2007/06/15/what-is-the-d...
Deals are structured all kinds of ways. How many times has someone posted about getting rid of a partner whose equity vested immediately? Even the article talks about 200,000 shares as if that means something. It could be 20% ownership. It could be 0.02%.
Timing is really important here, keep in mind the 4 year vesting. If they did not IPO within the time frame, find another one.
>That means in four years, your stock is going to have to NET (taxes are a healthy 20%, plus you've got fees, so it's gotta be pretty high...) you a $1 a share in order to be worth it, assuming you never recieve a raise or a bonus at your new job, and you don't count your 401(k) match, health benefits, less-stressful working conditions and shorter hours.
Pretty horrid that the post makes judgements ("decent stock", "WAY too high"), about options based on the quantity and price per share without considering what portion of the company the shares represent (and the initial valuation of the company.)
This is his hypothetical example; he obviously can. (i.e. he can say that the company is worth $1 million now so it needs to be worth $x million to make up for the lost pay.) Doing so would do a better job of communicating his message to the reader.
This whole thing isn't that important but why would it be against your confidentiality agreement to write a hypothetical example in one way versus another? I am assuming all of the numbers are fake in the first place.
My original point (again, not very important) is that I think it is more effective communication to say that a company is worth $1 million now and needs to grow to be $10 million for you to make back your lost salary via stocks, rather than talking about number of shares and strike prices (which you can't easily compare against other companies), since those values can easily be manipulated.
* You will have a specialized job at a big company.
* You will not be able to try new things and expand your skill set at a big company.
* You will never build anything big that defines you at a big company.
* There are very few "big" companies that work on exciting things. You will likely working on something boring. Yes, Conde Nast is boring.
Thus:
* No one is going to make you a VP. You've never proven yourself or taken any risks.
* There are many startups that have 'made it' and those risk takers who came on early, made a lot of cash.
* You will wonder for the rest of your life if that could have been you.
So if you feel that base salary and low risk is you, Cisco, Juniper, eBay, etc, all have your name on it. Please go there.
Everyone's experience is different, and I don't know what yours is, but I have had several jobs at BIG companies that defy your rules.
I have designed and developed several big multi-million dollar systems at enterprise scale. I am always able to try new things and expand my skills. Almost every company works on "exciting things" (although maybe you define exciting as a web-based project management system and I define exciting as highly-configurable e-commerce platform).
This comment is quite narrow minded, actually. Lots of companies, of various sizes, offer exciting and interesting projects with lots of freedom and control to the individual. If yours doesn't, keep looking.