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Compensation In A Very Early Stage Company

Q: What should my compensation be?  I’m going to be the first full-time employee of a new startup.  As it is so early stage, it is hard to say what the title is, but the role is certainly similar to a CMO or VP BizDev type person.  The company just raised around $500k in an angel round that is convertible debt to be converted at the valuation of the first VC round but better terms.  I’m more interested in equity than a market salary, but I do have a mortgage, wife, 1 child and another on the way. 

A: (Brad): The good news is the company has a little money in the bank.  That gives you (and them) the ability to have a rational discussion about the trade between cash and equity.  If you recognize this is a trade (e.g. the less cash comp you take, the more equity you get), you can have an intelligent conversation. 

The mistake I see most often is that the early employee doesn’t recognize this trade.  The conversation goes something like "I’ll take a 20% discount to market salary but I was 5x the normal equity I’d get if I was getting a full salary."  This irrational.  While you can make the argument that cash is worth a premium to equity, it’s not worth this kind of a premium.

The normal dynamics tend to end up between the two end cases – full salary and no equity at one end and 50% salary and 2x normal equity at the other end.  My recommendation when people ask me this question is to say "figure out the least amount of cash comp you can afford – ask for that – and then ask for roughly 2x the equity package you would normally get.  Oh – and expect that the equity will have normal vesting terms on it – you shouldn’t get better vesting because you are taking a salary cut."

November 13th, 2007 by     Categories: Compensation    
  • http://www.altgate.com Furqan

    Professor Noam Wasserman at HBS publishes an annual report on the results of a survey of compensation in startups. You can get an abridged version of the study at http://www.compstudy.com.
    The study typically covers 300+ startups and has data on the top 10 positions from CEO, CFO, head of engineering, marketing, HR, etc. It breaks down compensation by base salary, cash bonus and equity. It also has cuts on the data by location, headcount, revenue, rounds of financing and more.
    This work is by far the best I have seen on startups and really is a must read for entrepreneurs and folks considering joinging a startup.

  • http://alwayson.goingon.com/user/Syven Syven

    “Felt Fair Pay” (google it) is an example of a rational compensation system, but it is not adopted at the mainstream level because compensation is not rational. The rationality in equity compensation appears to be the generally accepted mark where people stop listening to you or taking you seriously and I generally call that a buyers market.
    A sellers market, where what one is selling is ones talent does depend on what kind of cap one is dealing with but even here it is not simply about perception but intelligent calculation. A mainstream employee in that regard is an employee, but a startup employee is an investor and the opposite of a silent partner.
    Though an employee is not a sleeping partner, IMHO a great employee is awake to long term interests and will have the smarts to assess whether the risk is worth taking and if the talent investment has a tangible payoff but should employees also determine their exit strategies, that I have not figured out because I have not been in the position of looking at the world as an employee for years.
    In my former life in the investment world, it is hard enough working out straight forward investment decisions regarding stocks and bonds, without contemplating all the exotic derivatives and options that are difficult enough in terms of their complexity, without a specific industry lacing all that complexity with their own industry lingo – so the reward comes in studying this stuff by peeling away the packaging and getting to the core of what in the end is a skill of risk management.
    At the simplest level of compensation there is the concept of fair felt pay and even when one dives into this (from a governance rather than employee point of view) it can become very elaborate and complicated – as much as the VC play where I personally think that venture capitalists never left the Grid Iron playbook behind and continue to see the financial world like some kind of football playbook – but as is of my unique want, I digress.
    Bottom line is not simply learning to exercise due diligence but retaining or at least coming to realize the wisdom of that old but less frequent ly used adjunct to cavaet emptor – which is “cavaet venditor”.