With a systematic approach to identifying the hot companies in a sector, connecting to them, and then evaluating the best opportunities, hopefully you’ll be able to decide between a few offers. Even if there’s only one offer on the table, there is always room for (at least some) negotiation. This post doesn’t going into general tactical approaches of job offer negotiation, but rather focuses on the fact that with startups a significant part of compensation is related to equity or options. So optimizing a startup offer involves not just one key figure – salary – but also the option package.
Nearly all startup employees receive a number of options figure in their offer. It is essential that you ask the “number of fully-diluted shares outstanding.” The details surrounding stock options are often complex and confusing for non-financially-oriented individuals. It is best for employees to understand as much as possible about their option grants (this subject could be the topic for an entire series), but the first place to start is to ask how many outstanding shares there are. From that point, one can calculate the percentage of the company an employee will own and a better gauge of the magnitude of this compensation component. It surprises me how many startup employees I know who are excited to have received a grant of x number of options, but never bothered to ask what relative percentage of the company that translates into. So the number of shares you receive (e.g. 10,000) is irrelevant (regardless of how big that number is) without knowing other numbers which they (likely) won’t tell you unless you ask.
There are numerous places on the web where you can benchmark the amount of cash and equity compensation for any given function, level, and startup stage. Ask The VC has a number of posts on compensation and benchmarks: http://www.askthevc.com/blog/archives/compensation/index.php. First, make sure you’re in the typical range. If you’re an order of magnitude off, then you have a severe set of mismatched expectations, which isn’t starting a relationship on a solid footing.
I’m continually surprised how many employees fall into the (often deliberate) trap of “we’ll take you on for six months and re-evaluate your compensation level then.” Even when this is offered in earnest because of a unique situation and individual coming in with a largely undefined role, inertia usually sets in and leaves the employee fighting an uphill battle after those six months. At a board level, VCs and other members don’t like to see someone recently hired already receiving new options or a salary raise after a short period of time. Their expectations about a six-month trial period were never set (or they’ll forget it anyway), believe me. The board’s bias will be to spend those resources on hiring new talent or to retain those who have worked at the company longer and harder.
A startup has two levers which it can pull in any offer negotiation. Both are limited resources, but it’s opaque how truly limited they are. On the equity side, each startup has a fixed option pool from which they’re drawing. It could be running low or it could have been recently “refreshed,” but it’s not necessarily the right signal within a negotiation to ask about this figure.
On the cash side, every startup will sing a song about being cash-strapped… and some of them really mean it. The best proxy for how a startup views its cash spending is office space. Look how the company views its office space – are you in a dingy warehouse where CEO sits in a cube with the rest of the company without an administrative assistant? Or is the CEO a corner window office in a multi-story building with a nice view and an admin who answers his calls?
So with imperfect information about where there might be some wiggle room and available flexibility, there’s a guide as to how to focus the negotiation. The following matrix lays out a general strategy of which dimension to push during a negotiation – keep in mind the grays in the in-between.
Equity – Your salary will be brought to market standards as the company progresses and hires people with equivalent seniority, but this opportunity is the one major bite at an equity piece.
Cash – Any VC-backed companies will have standard equity ranges which you’ll fit into and would raise eyebrows at the board level if deviated from. Plus, at an early stage, the risk-adjusted outcome of that equity is rather low. Instead, push for just a little bit better cash comp.
Cash+Equity +Terms – When the company put together a defined role put out req, they had idea on equity spend and guaranteed comp. I’d push on both but then also bring up other terms (vesting acceleration, severance) of employment which can be much more impactful in the long-term upside/downside scenarios.
Equity – By this time in a company’s life-cycle, the salary compensation is likely market level. You’ll have more luck arguing to be aligned with the imminent outcome in pushing for some additional equity compensation which is better risk-adjusted at this stage.
These above are general guidelines… I very often am asked “how should I negotiate my offer?” Of course there are nuances and different situations depending on mid-level people, where functionally in the organization the employee role, gradations in stage/history of company, etc.
One final thing to remember is that star employees will be re-greened (i.e. granted additional options during the course of employment) along the way, but it will always be on a new vesting schedule and rarely ever close to the amount of your initial grant. Whenever you leave a startup, you’ll be leaving some equity on the table.
In following the my four-part series on finding a startup role, you should be on your way to a great statup gig. Good luck.