June 25, 2012

How Do You Evaluate Compensation At A Startup Company?

How Do You Evaluate Compensation At A Startup Company?

Salary evaluation is an initial part of looking at any new opportunity. And despite the various salary calculators and Bureau of Labor Statistics tracking, compensation evaluation is not cut and dried by any means.

Large companies and public corporations often make available salary information based on roles, experience, and tenure. It may be fairly easy to compare remuneration between some of the large players because of this. But how do you evaluate the right level of compensation at a startup company?

Working closely with startups is one of the most exciting parts of being a technology recruiter. We get to recruit for and network with entrepreneurs and rockstars who are naturally attracted to today’s risk-taking and innovative opportunities on a daily basis, providing insight and coaching on making the right employer/talent match.

The starting salary at a startup may often be less on paper than at an established big industry player, so how do you evaluate it? Pre-IPO companies offer an equity component in various forms to early and key employees. The future value of equity (or options) is very hard to count on, or count up. It will depend on the ability of management to sell the company to investors and the public. It depends on the number of shares outstanding, the company’s key value drivers, the company’s exit strategy (years to go public or be acquired), etc. If you aren’t the math wiz, enlist your colleagues who are, go to your network or mentor. Take a good look at the growth projections, profitability (if there’s revenue), and the cost of growth. If available, look at comparable companies’ history and their valuations when they hit profitability. Now take all these numbers with a grain of salt as company valuation is more art than science.

Evaluating an opportunity at a startup cannot be only about the numbers. One of the first things we recommend to candidates considering an opportunity at a startup is to do some soul searching, and a little old-fashioned homework. Candidates should research the track record of the management team and investors. They need to understand the company’s product/services, and they need to believe in the company. They need to understand the sector, and what the competition looks like. The most important criteria in evaluating the opportunity has got to be the passion and confidence the candidate has in it.

Startups typically require extra dedication and provide extraordinary opportunities. There is a unique environment at a startup, in which the employees get to wear many hats and take a hands-on role in the strategic direction and bottom line outcome. The employees have a direct and tangible impact on the company’s success, something you can’t get when you are part of a hundred-person department. And beyond the personal satisfaction of making a difference and accomplishing something extraordinary with a small team, the ability to perform and thrive at a startup makes candidates even more marketable. Experience at a startup is a great springboard for an upwardly mobile career path, and can provide greater salary potential either at the startup due to its greater growth potential, or down the road when candidates move into subsequent opportunities.

Another important aspect to consider is that while there may be additional time and responsibilities required by a startup, there is also typically more flexibility. The lines of communication are also more direct and open and there is less red tape at a startup. Working at a startup generally means having access to (or being one of) the decision makers and being able to come up with creative solutions, not only to the company’s mission, but to the organization of work. Startups often offer extra vacation, virtual work arrangements, and/or flextime. Other perks include anything from jam studios to free lunch to company barbeques. Many employees report better work-life balance in their roles, perhaps due to the innovative spirit of a startup permeating innovative approaches to work.

To ultimately evaluate the compensation package at a startup, you must take into consideration all of these aspects and weigh them against your personal priorities and motivators. A startup is not the right environment for everyone, but there are a lot of pretty exciting benefits for the right candidates.

 

Still want more on the equity component evaluation?  Here is some good reading:

 

Putting a Value on Your Startup

Startup Valuation: How Much Is Your Company Worth?

Facebook’s IPO: Thoughts On Momentum, Pricing And Valuation (It’s Still No Buy)

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1 Comment »

  1. We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the startup equity so that the distribution stays fair until the fledgling company takes flight. check out Mike Moyer’s book slicing pie it talks about 50/50 share and how to divide it through his grunt calculator.

    Comment by sean — October 11, 2012 @ 2:29 AM

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