Now, Next, and At Exit: The Three Ways To Evaluate Compensation Before Accepting That New Startup Job. Salary Benchmarks Are Just a Single Piece of Data.

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‘Sell calls.’ That’s what a conversation between a job candidate and a VC are called. We’re supposed to help seal the deal, get the person to sign on the line which is dotted [insert Glengarry Glen Ross gif]. Now, I LOVE these conversations with possible new team members, but take a very different approach. I don’t sell them. Instead I try to understand what they’re looking for in an opportunity and help confirm that this would be a great career move, if the match makes sense. But if it doesn’t, or they’re trying to understand the pros and cons of, say, starting their own company instead, I’ll talk to them about my POV, without trying to talk them into, or out of anything. [Now it just so happens we also have a very good close rate, but that’s because the startups in our portfolio are typically interesting, rewarding places to be and they are thoughtful in the candidates pursued].

Recently in speaking with an engineering manager candidate who had been working at later stage/public companies, we got to discussing compensation. Not the specifics of his offer — I don’t negotiate on behalf of the company, just provide advice to both sides — but more about how he should think about it vis a vis his previous employers. My framework was a sort of triangle, and here are the three sides:

a female computer scientist looking into a crystal ball, digital art [DALL-E]

Now

Use available benchmarks (public, from friends, etc) to understand whether your offer is generally ‘fair.’ Once you’ve established that, and especially if there’s an opportunity to trade off cash compensation for equity [some startups will present two offers for you to choose from, or be open to some negotiation], figure out what your floor is for near-term salary. And don’t go to the startup if they can’t get above it in some easy or creative way.

The reality is that most hires to early stage startups will be taking a near-term hit to cash compensation or at the very least, earning less than they could if they *only* prioritized salary (and not role, company, or equity upside). The ‘below market’ hit way smaller than it was 10–20 years ago for sure, but it still exists, especially at seed and Series A stage. I want candidates to earn above their stress level: they shouldn’t have to remain in a bad living situation, fall behind on student loan payments, and so on, just to join a promising startup. Because that startup needs 100% of their professional focus and distraction benefits neither party. It’s also a reminder why keeping your personal burn rate low is such a career expanding move. If your personal burn rate floor is high because you’ve been living off a Google salary and can’t imagine how you’d survive earning less, you won’t find most seed stage startup offers to be competitive in the near-term. And I’ll tell you that during our call.

Next

Most candidates aren’t thinking about ‘Next’ because it’s only conceptual, but I find it is important to discuss. Basically, do they think there’s room for promotion and ongoing recognition/retention compensation? They should have this conversation prospectively with the founder/hiring manager just to understand the startup’s emerging compensation philosophy. Sometimes a fair, but not bracket busting, initial offer grows more attractive when you realize there’s ability to get other bites at the apple as your role within the company (and the company itself) grows. Now, with very few exceptions (usually at the executive levels), these compensation reviews aren’t written into you offer letter, but if you don’t trust the company’s forward looking statements and the culture they hope to create, please don’t join in the first place!

At Exit

What do you want your equity to be worth at exit? Kind of a crazy question to ask, right? I mean, who knows, I just want it to be worth a lot! But think about it similar to the way a venture investor might. If I buy 10% of the startup at seed, with say, a $10m valuation, what do I think I’ll net if the company exits for $1b (rosy scenario!). Well, I’ll probably do my pro rata in the A, then take some dilution, so let’s figure I own 4% when it’s all said and done. Ok, I turned my $1m initial (plus let’s say another $1m in pro rata) into $40m. Nice!

As an employee you can do similar math with a little help from the company. You’re a senior engineer joining early, and get 1% (remember I believe in giving early team members meaningful upside). You don’t do pro rata per se, but you do get additional grants as you get promoted/retained, so not crazy to say you end up at exit (in the above scenario) with .4%, to use same dilution multiple. Ok, so if this company is worth $1b, then you walk away with $4m in equity (and $20m at $5b, etc). Or maybe the company is ‘only’ worth $500m at exit but raised less capital and you’re still at 1%, so $5m in equity. Whatever, it’s all ‘fake math’ until the exit occurs, but thinking in this way sort of gives you the answer to where “NOW” + “NEXT” can lead. And you can do your own scenario planning for what types of exit scenarios are interesting to you.

Compensation is a very personal situation based on your own situation, risk tolerance, and company philosophy. Some people are in a position to take on more risk than others. And some people are blindly given more or less than they deserve. Volumes have been written about these questions and I won’t address any of them here. Instead just take away this simple triangle to perhaps help you frame the compensation package from an early stage startup. And if I’m fortunate enough to be talking with you about a job at a Homebrew portfolio company, this is what I’d be telling you during our non-sell ‘sell call’ 🙂

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Author: hunterwalk