I get this question a lot from friends - "I'm thinking about joining a startup but I'm not sure what kind of compensation I should be getting." I figured I'd answer the question on my blog and just point people here from now on.
With a small company you won't get comparable salaries or benefits to a large company, however you should expect to get a chunk of stock in the company.
How big a chunk depends on a two things:
- What level you are contributing at?
- What kind of risk is there in the company?
The first question is usually the most straightforward to answer. There'll be some negotiation involved here - Are you a senior product manager? A director? These people get compensated at different levels. Rember to ALWAYS think about stock options in percentage ownership of the company.
Salary.com has a good article about the typical percentages (note that this data is from 2000 but the numbers seem about right to me). The key table to look at is table #3. This shows you the % that you should expect at an IPO or other liquidity event. Many companies take about 3 rounds of financing to hit this point (A round, B round, C round), and at each round you can expect to be diluted about 50%.
That means that your same shares get you half of the percentage of the company that they did before. NOTE - this doesn't mean that your shares are worth less or that the company is worth less. In most cases it's hopefully that you own a smaller share of a bigger pie.
Example - you have 0.2% of the company when the company has raised its A round and the company is valued at 10 Million dollars. After the B round the company is valued at 40 Million dollars but your percentage dropped to 0.1%. Your shares in the A round were worth 20 thousand dollars. Your shares after the B round are worth 40 thousand dollars even though you own less of the pie, the pie is bigger.
Why is that important? You should be looking at what your % will be when you exit. So let's say you're entry level and you should exit at around 0.025%.
Working backwards that means that at the C round you should have 0.025%, B round should be TWICE this at 0.05% and an A round should be TWICE that at 0.1%. Note that risk is sort of built into the thinking above. Most companies are less risky at later funding rounds (assuming those rounds are up rounds) because the business is more proven.
Questions to ask that help you assess how risky the company is
What has the valuation at each round funding for the company been?
If the company has had a down or flat round (got a funding round where the valuation of the company was lower than or equal to before) that means that the company hasn't really figured out its business model yet or has run into a snag with its business.
Does the company have real revenue?
Obviously if the company has revenue then it's less risky and if the company is profitable that eliminates even more risk, that means that at some level the business side is probably figured out.
Have the people running the company done this before?
Experience is no guarantee of success but it's almost always the case that experienced people will have more ways of seeing a bad situation before it hits and will be better at getting help in finding their way out of one if they do stumble. Established, trusted contacts with VCs, other CEOs etc. shouldn't be underestimated.
How much money is left in the bank? What is the burn rate?
This is a very important question. Don't take "That information is confidential" as an answer! A company should have at least 6 months of money in the bank unless they are actively going out and looking for money. Again it's something for you to think about in terms of risk. The first company I worked for in Silicon Valley (Eazel) hired me in January as it was trying to close its funding. Turns out they never did and I was out of job in April.
All this is not to say don't join a risky startup - it's just that the more risk there is the more cash or stock you should be looking for.
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