Say you've always wanted to work at a startup.
Let's go on to say that the one thing that has prevented you from pursuing this dream further is because you have a zillion questions about salary and other types of compensation.
If this describes you, you’ve come to the right place!
This article will help to clear away the mind-deadening fog by answering every single one of your questions.
You’ll learn how much startup employees make, how to negotiate the best salary you can, why salary isn't the most crucial thing when it comes to compensation, and some other stuff as well.
How do you get paid in a startup?
Compensation is structured a little differently at a startup than it is at a later stage company.
That’s because salaries are always hugely dependent on the life stage of an enterprise. Your salary at a startup company consists of the following three parts:
What you’ll make depends on what stage of growth the business is in, your role, and your previous experience. The earlier stage an organization is in, the less your total compensation package.
The bad news is that in the beginning, your salary will probably be lower than you hoped it would be.
The good news is your equity will be higher, meaning if the company is sold or goes public, you stand to make a killing.
The older the company gets, the more your compensation in the form of salary and benefits increases, getting ever closer to the market rate. If you want to have a better idea of what you’ll make, research salary ranges at Glassdoor.
Nobody works at a startup for the benefits
If excellent benefits are crucial to you, you shouldn't be looking to work for a startup.
Many experts say that startups shouldn't spend a lot of time figuring out compensation in their early years. Instead, the CEO should focus on making his organization successful. This makes equity more valuable, but it’s going to take time.
The fact of the matter is that most startup employees don't stay with the company because of the compensation. They stay with it because of the founder's vision and the chance to cash in their equity when the enterprise goes public or is sold.
That's why most startups try to make compensation less of a concern by ensuring their employees can live off their take-home pay and have a fair slice of the equity pie.
However, be advised that mature startups often offer better benefits than traditional companies do. For example, Airbnb offers a generous $2,000 travel stipend to every single team member. Other startups have lavish catered lunches twice weekly, unlimited vacation time, or health insurance with premiums that are 100 percent paid for by the company.
Equity and stock options
Equity is the part of the company you own and can be worth a lot if the enterprise ever goes public. When you work at a startup, you'll never be given equity. You'll receive stock options instead, which provides you with the opportunity to buy equity at a discount.
The founder won’t give you all your stock options at the outset. What’ll happen is you’ll earn a steadily increasing number of options over time—usually four years. This period is referred to as a vesting schedule.
A typical one gives you one-quarter of your options at the end of year one. You’ll receive 1/48 of the rest of them every month after that. Once your options are fully vested, you'll be given a chance to buy them.
Becoming a startup employee in its early days means you'll get more stock options at a lower price. The more mature the enterprise becomes, the less risk it assumes, and its ability to pay market rate salaries gets better.
Therefore, if you join a startup in this stage of its life, you’ll get fewer stock options at a higher cost.
You could make out like a proverbial bandit if the company sells or goes public. To give you a dramatic example, employees who received stock options in Instagram’s early days were able to bank on average profits of almost $8 million.
You probably won't rake in this kind of dough. However, you could, which is one reason working for a startup can be so exciting.
How much do startup employees make?
As of January 2021, the average take-home pay for a startup employee is $102,526 a year.
Let’s look at that figure more closely to figure out what the salaries of a Series A management team should be.
Let’s say our hypothetical enterprise is in the Big Apple and hasn’t reached the breakeven point yet. It has raised five million dollars in funding, and there are four members on the management team.
At this stage in the startup’s existence, the compensation should be approximately 25% below market value. This is because backers want management to be able to pay their bills and not have to be worried about the enterprise not being financially viable. Investors also don’t want startup employees to get too complacent by making too much in weekly wages.
That’s why you’re going to find a startup compensation package to be more weighted towards equity ownership instead of generous salaries. The way backers see it is the more startup employees make, the less hungry they become—which can be tantamount to signing a startup company's death warrant.
Maybe you’re more ambitious, and don’t want to be just any old employee--you want to be the CEO. Let’s take a look at the numbers.
According to a recent report, the CEO of a startup company earns an average annual salary of $130,000. However, all kinds of things can influence how much a CEO makes. This includes total cash raised, money in the bank, industry type, and total amount of experience.
The report's authors found that how much cash a startup raised dramatically impacted the CEO's take-home pay. For every $1 million raised, a CEO will earn between $4,000 and $5,000 in salary per year.
CEOs at organizations that have not recently raised capital will often reduce their take-home pay to save money.
How to negotiate the best startup salary you can
There are a few things you should know when negotiating a startup salary:
Know your lower limit
Do plenty of research beforehand, so you understand what the market value of the job is.
Offer a salary range
Coming up with a salary range is a savvy move for the startup job seeker.
That’s because you can ask for the upper amount, which gives you plenty of negotiating room.
When negotiating, think about the entire package and not just the salary. With startups, compensation goes way beyond what you’ll take home in a paycheck. Look at factors such as equity, bonuses, health care, retirement plans, and the potential for growth within the organization.
Make sure your pay goes up as funding does. In the beginning, you’ll be getting more compensation in the way of stock options and less in salary. However, as funding for the enterprise increases, your paycheck should go up too.
Once the organization raises some real cash, you should be collecting a fair-market salary. That’s why it’s wise to get the arrangement you have with the company in writing, so there’s no misunderstanding.
Don’t say your dollar amount too early
When interviewing for your dream startup job, the recruiter might ask what kind of salary you’re looking for. You want to avoid a straight answer as much as you can because otherwise, you might make the tragic mistake of locking yourself into a low salary.
Conversely, you could find the glorious opportunity of working at a startup dry up before your eyes because your salary needs were too great.
The bottom line?
Don’t bring this topic until an offer has already been made.
If they push you to spit out a figure, try to come up with reasons you should be paid more than you currently are—for example, your educational background or impressive experience.
Compare against market rate
Think of your total compensation as your yearly salary plus the current value of the stock vesting that year if you're getting stock grants. If you're getting stock options, it's the difference between the present value and the strike price.
Then you can compare this figure against the market rate.
Next, you'll have to factor in the enterprise's financial circumstances. Suppose the startup is small and in its infancy. In that case, you might have to take a pay cut because companies like this offer less compensation in exchange for future equity.
This is especially true if the enterprise is venture-funded because investors have already taken a massive bite out of the equity pie. Usually, smaller startups offer more equity and less salary. Bigger companies that have raised lots of money will be able to make larger salary offers.
Decide what’s non-negotiable
To progress further in the negotiation process, you need to know what your personal non-negotiables are.
If the opportunity is a long way from where you're living right now, you need to figure out how much it'll cost to relocate. You'll also need to decide if you'll be able to pay for the expenses out of your pocket or if you're going to need a relocation bonus.
Suppose your compensation package relies heavily on bonuses like commission-based sales. Will you be okay with a variable monthly income? Also, decide if you would prefer the security of a higher salary or the possibility of more significant equity resulting in a future windfall.
In any event, never tell the recruiter the lowest amount you'll accept. If you do, this figure will magically solidify in his mind and become the salary amount he’ll hold you to.
Get help finding the right job with the right salary in the first place
If you’re looking to get a job with a startup, contact the experts at Hunt Club.
We’ll use our proprietary technology and global-spanning network to sift through the thousands of possibilities to find your dream startup job.
Call us today!