Serious career question

Ok, so, startup craze is in the air and I have an opportunity to go as a very early employee (#2) to a well funded startup.

Given that i will be getting 1-1.5% equity stake, how much is reasonable to give up on compensation, if any?

Start-up area is very lucrative so possibility of 1b+ exit is not out of the question, although it is ofcourse very very small.

Let’s assume hyptothetically, that my current compensation is 180k all In and that i have 1 kid + Mortgage.

Most startups will cap salary at about $120k. This is probably your starting point in negotiation. However, it is not unusual for people to get paid less or even zero.

In any case, congratulations on your opportunity, and I am sure you will make the best choice for you and your family.

Congrats at the opportunity. I hope it strikes gold for you.

The question is how much would you sacrficy of yearly income for 1.5% of equity?

Depends on the product/service and the person in charge. Much more the latter actually. A good leader can accomplish just about anything. If you have full faith in the guy/gal that’s running this start-up, and you know you’ll work well together (small, new shops will get stressful), then I’d be willing to take a pretty big chance. Of course, it also depends on your current fiscal situation. Can you survive a year or two at a lower salary and still pay the bills?

Also, if you’re #2 I’d ask for more than 1.5%.

Person in charge is very well respected and very well connected. He is a veteran in start-up space.

I can survive a year or two at lower salary, but is it worth the gamble? I will have to start spending some of my savings.

^ that’s a very personal question. some people swing for the fences, and some are very risk-averse. no one knows you better than yourself

you have to look past the big lottery type $$$ signs, and think if you really believe in the opportunity.

How valuable are you? I’d aim for 4-6%. You’re taking the risk. You’re putting your financial stability at risk. No, ask for 9% and negotiate away.

Depends on the probabilities and timing of the possible exits. I would honestly PV a few probability-weighted exit possiblities and do the math. I also agree with Sweep that 1.5% seems a bit low for employee number 2.

There’s no way to answer that without specifics of the business, which I assume that you’re unwilling/unable to give. For example, a startup with an innovative approach to data sciences could justify giving up more than a startup PC manufacturing business.

Keep in mind that if the business flounders and it doesn’t create real value over the next couple of years, your 1.5% could be diluted down quite a bit. And rather than take 1.5% now, I would negotiate a vesting schedule over several years where you accumulate more than 1.5%. This could give you room to negoatiate a higher salary now, and the equity plan could be more lucrative if the business continues to show promise.

There is a lot of subjectivity around equity, as it’s not like a cut-and-dry hiring process like a big investment bank filling their analyst class with hundreds of analysts worldwide out of college, and everyone gets roughly the same package (even bonuses, which still range fairly widely, are not nearly as dispersed as they’d been in past years).

On the face of it, however, I agree that 1.5% is low. You are taking a lot of career risk and are clearly a capable individual, so no matter how ‘decorated’ this founder / managing member is, you also bring a lot to the table as the #2 employee (otherwise you wouldn’t have been approached).

Hard to say what the right number is, but if you’re going to take the potential downside risk of a failed startup, you need to participate in the upside reward if things go well. That number is definitely larger than 1.5% in my view.

Let’s assume that 1.5% is protected from dilution. Also let’s assume that startup is an innovative approach to data science and not PC manufacturing.

Still sacrificing 60k, 80k or maybe even 100k per year, will it be worth it?

For example if startup is sold in 3 years for 100m, I will gross 1.5m, in the same period i would have earned 0.3m

so odds of selling has to better than 0.3/1.5 or better than ~20%!

I’d do it, the biggest question I would have would be ‘do I have a way back if this goes wrong’

Does your wife/partner/baby momma work professionally? Having a stable cash stream definitely provides a safety net for one partner to swing for the fences (one reason why married men earn more on average). Being in a situation with a mortgage + kid + no job is pretty awful I’m sure. So my risk adverse self would have second thoughts if you don’t have a backup income that can at least keep you off the streets.

I am not an expert on start ups by any means, but wouldn’t a 5-7 year timeframe be more reasonable for the early stage shops?

Agree on ~5% equity share.

Geo: My wife doesn’t work. I was in situation, With kid, mortgage and no job. Yes it is stressful, but i am willing to risk it. My biggest cocern is that Numi raised. I am not sure that with 1.5% I can make it big. I already turned down one 1.5% #2 offer before, for the reasons that i didn’t believe company will be worth north of 100m.

In case it won’t make it big, i will have to start on the spot where i am right now in large corporation, minus 3 or so sacrificied years, minus 300k or so in revenue

Also, it depends on how much money you currently have. If you already have a couple Ms in the bank, you can afford to take some risk. If you have net negative balance with the mortgage, that is a very different situation.

I would also take a real look at why you are doing this. For instance, are you just bored at work and want to try anything new, and is this preventing you from making a purely economical decision?

Simple - I want to make it big, and as a software developer, that is the only way i can make it big. And by big i don’t mean 5M life time earnings

I think the most reasonable way to look at it is the post-money VC valuation. Multiply that by 0.015, estimate the number of years you plan to work there, and see if it’s greater than your discounted, forgone salary.

There’s obviously lots of risk, but VC’s use huge discount rates to adjust for it. And their analysis is probably done by people with the relevant experience.

If you don’t take it, you will regret it years from now. You can always go back to your job. This opportunity might not comeback. If you trust the person in charge, go for it. Don’t be afraid to get out of your comfort zone and risk failure. Even if it doesn’t work, you will be a more marketable employee after this experience rather than staying put. You still have decades to your career, 3 years is nothing if you look at the big picture.