Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 3 down vote favorite
2

Suppose I got an offer from a startup that currently has funding to start hiring employees. Suppose they are offering a $100K total compensation package, such that I can choose to take a reduced salary for the equivalent in stock options (up to a certain limit). So if I am aggressive I can go $50K cash salary and $50K options a year (meaning $200K worth of options vested over 4 years with one year cliff). Suppose the current valuation of the company is $4 million, so that means I can own up to 5% of the company (and they are ok with me owning this amount, as I will be joining as one of the first few employees.)

Suppose $100K is below my current market rate, so it seems I will not only be getting a pay cut, and then additionally exchanging my salary for equity. They mentioned that their other potential hires might also be taking even larger cuts (based on the total compensation).

Is this practice typical for startups?

share|improve this question

2 Answers

up vote 14 down vote

Just wanted to give you couple of things to consider:

  1. Don't gamble what you can't afford to lose (been with startups for 12+ yrs, if you tell me it is not constant gamble, I will call you blind)
  2. Valuations are fantasy. One day the company could be "worth" $4MM, next day - $0.
  3. Treat options like a bonus. If you can't live on the base salary, go find another job. It is very likely options are going to be worthless (your odds are somewhere in the lottery range).

Not knocking startups, just giving you heads up about reality, so you don't end up another young person broke, credit cards maxed out, and saying "what the heck, they told me the equity will make you rich".

share|improve this answer
2  
I'm on my forth startup and I have options in all previous ones. Two are dead and one will probably never sell for anything that will make it worth my time. Don't bet on options. – Ryan Detzel May 24 '11 at 20:40
up vote 0 down vote

Just remember that options are lottery tickets that actually pay out sometimes, and that your percentage will most likely become heavily diluted. Dilution doesn't have to be a problem if the valuation actually increases to match the cash infusion. That is, if your share goes down by 1/2 but the value of the company really doubled, you haven't lost money, only bragging rights about your percentage.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.