11 Comments

Summary:

These days it is fairly easy to use a general rule of thumb to come up with the valuation a startup is likely to get from investors. However when it comes to hiring employees, no one really has a clue about how they should be compensated.

confused

Photo via iStockPhotoIf you are an entrepreneur, then it is fairly easy for you to use a general rule of thumb to come up with the valuation you are likely to get for your startup — depending on the stage of the company (seed, series A and later stages) and the scale of success or the merit of your idea. And that is possible, thanks to numerous blog posts, tattling tongues and other new sources of information.

However when it comes to hiring employees at the early stages of a company, no one really has a clue about how they should be compensated — cash, equity or what combination of both? Why is that? Because a lot of the salary and equity-related data is never really shared by startups, argues Naval Ravikant, co-founder of startup funding market place, AngelList.
The market, he points out is very opaque and as a result you don’t have much consistency in terms of who gets paid how much and more importantly how much equity an early stage employee gets.

AngelList wants to offer up aggregate data to its startups and create more transparency. Angel List offers job listings for its member companies (most of them at early or very early stages of their development cycle) and asks them to list the salary and equity they are going to offer for specific jobs.

Ravikant looked at listings across 60 startups and plotted the salary and equity data on a chart and as you can see it is all over the map. From the data, I saw companies that are offering hefty packages — cash and equity — and others that are being stingy. The compensation for the much in demand iOS developers is worse than the EKG chart of a cardiac patient.

Apart from the opaque market, Ravikant believes that Google and Facebook are paying top dollar for engineering talent and as a result, salaries are all over the map. Startups, today, have to compete not only on salary but also on equity. The problem is only going to get worse as 2012 progresses. As I wrote earlier, the Facebook IPO could act like a spark for further startup creation activity which in turn would overheat the job market.


  1. Great data, wrong headline. Chart says that positions at most startups pay $75-$100k with a half to two points of equity depending on the job and the stage. Sounds right. Talent markets do not GET more efficient than this.

    Share
  2. Ashwin Desikan Monday, February 13, 2012

    Om, interesting post. By looking at this trend it appears more like startups are paying anywhere between 75-100K $ and 1-3% equity stake on average. Is there any data around what kind of positions are these? Wondering what is the stake being provided to the developers in comparison to architects/ product managers etc.

    Also, close to 8% from the above data have employees working for no pay, do the startups reward these employees with co-founder status?

    Share
  3. There may be a difference between VC-funded and self-funded startups.

    Share
    1. Good point, almost certainly there will be. Geography will also play a major role I would expect.

      Share
  4. hahaha. I especially enjoyed the 0 salary, and 1% equity “Offer”.

    Share
  5. I was browsing the AngelList job postings, and one problem I see with their data is that companies don’t seem to be very willing to give specifics on the compensation in public – they might give a range of $50K-$100K, and an equity range from like 0.5%-3%, which makes the range enormous.

    Share
  6. Question regarding equity – does this come in the form of options, grants, or something else? And how is that percentage calculated – in today’s stock value or future stock value? Let’s say a company’s pre-IPO stock is valuated at $5 with a 5-year target of that stock reaching $50. Does it make sense to offer a $50,000 salary in the amount of 2000 shares, saying that it COULD be worth $100,000 in 5 years? Or are you essentially just offering them $10,000 in salary? Basically, I was told they’d give me $50,000/year in the form of 2000 options, even though today’s value is only $5.

    Share
  7. Start-up compensation is as much an art as it is a science. The positions listed in the data that offer more than 1% of the company are very early positions. They are unlikely to be employee #14 or #50. They may not even be #8. We also don’t know enough about the 60 companies that were the data source to take a next step yet.

    The current math of equity distribution is so front-loaded right now that it makes it hard for companies to offer any real stake to employees beyond the first 10 or 15.

    There is also a disconnect between the average entrepreneurs expected time of a liquidation event (they thing about 4.5 years) and the actual time it takes (right now 8-9 years). Add into this that NO company is the next Google or Facebook and you have yourself a conundrum.

    I recently wrote an article that asks if the Equity COmpensation Paradigm is broken (http://www.compensationcafe.com/2012/02/is-it-time-to-change-the-equity-compensation-paradigm.html)

    I look forward to this discussion expanding as we work to create a solution for both the lack of data and current poor compensation design.

    Share
    1. > The positions listed in the data that offer more than 1% of the company are very early positions. They are unlikely to be employee #14 or #50. They may not even be #8.

      Agree

      > There is also a disconnect between the average entrepreneurs expected time of a liquidation event (they thing about 4.5 years) and the actual time it takes (right now 8-9 years).

      Not quite right in the high velocity go go hot spaces it’s more like 2 to 3 yrs max. Case in point Assistly acquired by Salesforce for $50M.

      Share
  8. We are actually working on addressing this exact problem at http://www.FairSetup.com. The idea is that we do impact-based profit-sharing.

    Share
  9. It is not easy finding staff in Asia who will take a punt and work in start-up. Staff are exactly that – they are salary-makers. Their concept of reward is getting a pay cheque each month. Entrepreneurs are the opposite – they are people who give up short term gains to get more in the future.

    Recalibrating a salary-maker’s effort-and-reward programming is not an easy task.

    Share

Comments have been disabled for this post