Budget at least $80k/employee in payroll, benefits, insurance, and misc costs. (you'll have to budget more if you plan on hiring more experienced talent)
Competent engineers are willing to get hired for what amounts to ~35k / year?
Came to post the exact same thing. With 20-30% going to insurance/benefits, taxes, misc costs - that's an amazingly low number....even more so considering they're in SF.
I found this statement pretty surprising. Maybe in the next step when it gets doubled, that's a more realistic number. $160k/employee? Either that or the only employee is an office admin?
(To clarify)
80k/yr total overhead for 18mo per employee, counting facilities, health care, direct and indirect costs, etc. You don't necessarily have to spend it, but I think it would be irresponsible to hire someone on a non-founder basis without having that kind of money available to back it up. If someone's willing to take a subsistence or below market salary, fine, but it should be explicit.
I'd also be reluctant to hire any permanent employee without having at least 12mo of salary in the bank to pay him; 6mo might be ok if you disclose this to someone and let him make his own choice. It would suck to have a choice between startup and facebook, take the startup, then get laid off in six months. That is the kind of risk a founder should take, but not regular employees. If you can't cover salary, then contractor status makes more sense I think.
Insurance/benefits for 20 something developers at a startup consists of ramen and free pizza on Mondays.
That's actually a very reasonable salary and keeps out the guys who are looking to collect fat paychecks working 35 hours/week. You want work/life balance and 100k+ per year? fine, go work at Google. If you want the upside that comes with working at a startup you need to be willing to take on some of the risk.
"That's actually a very reasonable salary and keeps out the guys who are looking to collect fat paychecks working 35 hours/week. You want work/life balance and 100k+ per year? fine, go work at Google. If you want the upside that comes with working at a startup you need to be willing to take on some of the risk."
That's just a steaming pile of horseshit. I'm sorry to be so blunt, but I've been in this world for a while now, and nothing infuriates me more than when entrepreneurs try to delude employees (particularly younger employees) into working for far below market in exchange for promises of fairy farts and equity dreams.
In a city where a one-bedroom apartment costs >$2,000 a month, $100k isn't a "fat" paycheck. It's right about average. And even if you choose to work below market, the <1% equity stake that most funded startups are going to offer you won't make it worth the opportunity cost in anything less than the most exceptional outcome. You say you're working for $60k a year in San Francisco? Yeah, I hope you're getting a founder-level equity, because you're living with roommates and eating ramen.
I suppose the only plus side to this kind of nonsense is that any developer worth her salt will be poached within months by any one of the dozens of local startups that are looking for engineers and willing to pay market wages.
Don't fall for it, kids: you deserve to be fairly paid, and get some equity.
The problem with equity is that at most venture backed companies, rank and file employees don't know what percentage of the company their equity package represents, or could represent in the future. Naive employees (most of them younger) chasing startup riches often like to think in terms of "If I own 1% of the company and it sells for $500 million I'll be rich!" but if you ask them what ownership interest their 75,000 stock options might represent, they won't be able to tell you.
Employees who think "it's all about equity" would be wise to consider the following:
1. It should go without saying that if you're granted stock options, which is typical unless you're a founder, you don't actually own any portion of the company. A stock option is, obviously, simply an option to purchase stock at a fixed price at a future date.
2. Assuming your employment is at-will, you do not have control over the vesting of your stock options. You could be terminated at any time, including before a large portion (or even all) of your options vest.
3. Dilution is a fact of life at venture backed companies. If you join a company early, your expectation should be that you will be diluted, and significantly. This dilution can also be rapid (i.e. a dilutive new round of funding closes a month after you join the company).
4. There are plenty of ways the value of any equity you own (or may one day own) could be diminished. If your company is acquired, for instance, but the acquisition results in the exercise of a liquidation preference, it's conceivable that your equity will be be worthless, or of such minimal value as to be effectively worthless.
Bottom line: if you're not making six-figures and aren't already independently wealthy, which covers most of the young folks who think equity is an apples-to-apples substitute for salary, accepting a significant pay cut for "equity" is sort of like planning your financial future around the assumption that you'll one day win the lottery.
As they say, "one in the hand is worth two in the bush."
I think your statement is pretty outlandish. How many people make over 100k in general regardless of your location. I live in Manhattan (probably the worst bang for your buck possible cities) and started as staff making 62K and that was pretty good.
The national average is well below 60k for entire families.
No one deserves anything. You need to work for what you want and equity is earned through sacrifice. You're not sacrificing anything if you're getting paid fairly by market wages. So please don't act so high and mighty.
I have nothing against paying people high salaries for great talent, but I don't appreciate anyone thinking that they're earned the right to everything by simply being present at the moment.
If you want equity then you should be sacrificing like founders do.
Funny how virtually zero successful startups have followed your model of paying people 100k+ at the beginning (first 1-2 years, pre-series A, or pre-profitability.) Probably just a coincidence though.
Early-stage employees are often compensated with huge amounts of equity. I'm a fairly senior-level guy, and would happily trade a bigger salary for a large equity chunk at a startup, but we're talking a large chunk, bigger than a lot of companies are willing to give to non-founders.
Let's say that I usually make $160k/year, and I'm willing to work for half that at a startup for four years, which means that I'm giving up $320k in income.
I'm not going to do that for a chance at earning $320k, but I'll definitely do so for a 10% chance at earning $3.2M.
Which means that if the company exits four years later at $50MM, I'd need a 6.4% equity stake to make my target. If the company exits for any less than $5M, I've lost money.
Naturally, this is a simplified analysis of the situation, but it illustrates an important point. I know of a lot of startups that want to pay their employees peanuts, while at the same time giving them a tiny slice of the pie.
None of these companies have been massively successful either, in part due to the best talent having zero interest in committing to a company where they aren't valued.
This is exactly the reason why I've never been interested in working for a startup. Learning experience? Yeah, I've got that working during the dotcom boom/bust cycle.
Your reasoning is spot on but the numbers get even more unappealing once dilution in future rounds of financing kicks in.
If you have the experience, be a co-founder at a startup with pretty big upside. If you can't find that, the 150K/year salaries are a much better deal than <5% equities.
At least in NYC, you can easily, easily, easily live on 60k yearly, quite comfortably (your own one bedroom, eating out often, etc.) You can't live in Manhattan, but that is a pretty small sacrifice. I can't imagine SF is so much more expensive.
If your attitude towards the startup is that cynical, then you shouldn't be working for a startup. Go to bigco where they will pay you lots for doing nothing.
Startups are difficult and need people who want to work hard and sacrifice in exchange for greenfield technical development, high responsibility, and high upside. By all means ask for more equity. But a startup is about the future, not about huge comfy salaries in the present day.
This is especially true given that the economy is now headed back into the toilet. Tide is going out and many startups will die. Those that survive will be those in which neither founders nor employees are unduly greedy.
'If your attitude towards the startup is that cynical, then you shouldn't be working for a startup. Go to bigco where they will pay you lots for doing nothing.'
That's just as cynical. There are bigcos that have fantastic projects AND pay you, as well as startups that offer poor pay and little equity in exchange for lots of hot air.
Unless it's Google or Facebook (or any other mature startup), I'd better be getting more than 2% if I'm being paid less than 50% of standard market rate. Otherwise, the equity is more of a nice bonus than the main selling point.
You're right, many startups will die. All the more reason why people have to be careful about exchanging salary for equity.
If your attitude towards the startup is that cynical, then you shouldn't be working for a startup. Go to bigco where they will pay you lots for doing nothing.
This is just reality. Why make 60-65k at a given startup when you can make market wages at another startup?
But what are the upsides of working for a startup? Working hard and long hours is not really sounding that attractive to me. Maybe it lures kids who want to test their limits?
That 80k was over 18 months, and you're not including social security tax (which is another 10%) plus a computer, etc. 60-65k / year engineers will affect your burn WAY more than 80k over 18 months.
Do you have actual evidence of this? Can you point out a superstar engineer who will work for 65k + options? I can't think of any, and I know quite a lot of developers. I haven't even heard of one working for that little.
A $150k developer can handle setting up and managing the infrastructure, build scalable products, manage a team of $65k developers and be able to build a product from scratch (incredibly hard to do).
A $65k developer can follow directions.
There's no such thing as a successful CRUD product anymore. Everything has been commoditized.
It's the same reason you pay a surgeon a lot of money. Sure, 80% of the time their job is somewhat cookie cutter, and maybe even a med student could do it.
it's the 20% of the time when things get tricky that you really want an experienced surgeon, or in the case of building software that a million dollar(or billion dollar) company relies you, that you want a superstar engineer to handle .
When a junior developer is given a module to write, he may or may not screw that up to some degree. Worst case scenario if he does though, is needing to fix/debug that module.
When a senior engineer screws up core architecture/engine code...the whole project is in turmoil until it gets fixed.
But you're right, it does keep out the "guys who are looking to collect a fat paycheck working 35 hours/week." I didn't know that that was a problem, though; I haven't met anyone like this. I have met people who prefer a steady paycheck right now because they're not in a position to do otherwise. They're definitely open to doing so (or founding a company) down the road.
I'd like to point out there were not a lot of people willing to take the leap and join a startup ~4 years ago. There are many more founders around now, both technical and business, and they're not a limiting factor in the startup reaction to the degree they were four years ago.[1] Now I'd say it's leaning toward technical employees, and the employee equity pool may reflect that by growing from 20 to 25, or even 30%.
[1] I'm eyeballing, and judging from hanging out in the valley. Sam Altman said technical founders were the limiting factor in startups about four years ago in startup school.
1. Were your developers granted actual stock, or were they granted options?
2. Your company is angel-backed. If and when it wants or needs to raise additional funds, is the company obligated to protect said developers from dilution?
Assuming that you're a typical angel-backed company, the answers to these questions are "stock options" and "no." Which would mean that:
1. Your developers don't own anything.
2. Your developers don't have an equity interest (or potential equity interest) that they can trust will actually represent a specific percentage interest in ownership if and when their options are exercised.
I don't mean to pick on you, but your comment highlights two things:
1. Just how loosely the word own[ership] is used when it shouldn't be.
2. How percentages are used to inaccurately describe potential equity stakes when those potential equity stakes cannot be reliably translated into percentage-based (potential) ownership interests.
While I agree that sacrificing salary for stock is a very risky strategy your comment is overboard and inconsistent.
1. If employees got granted stock they'd have to pay tax on the entire amount which they can't afford. It's not that expensive to buy though since early on, the options are usually granted at a fraction of the actual price though which means they're often 10x cheaper than the going rate. Nobody "owns" their stock until they exercise their options but if they feel it's not worth more than their original option price then the company's flatlining and it's pretty academic anyway.
2. Nobody in the company knows what their percentage will be at the time of exercise. That's regardless of whether they hold options or stock and is part of the territory. Everyone's stake gets diluted when new money comes in just as everyone's value is inflated as the valuation increases. If you propose anti-dilution clauses for employees then someone else will need to double down on dilution and I'm not sure who you propose that should be.
So
a) "ownership" comes down to whether someone exercises their options - their call but they have the legal right.
b) If you don't like % equity descriptions (which will almost always go down), translate into $ descriptions instead. "If we exit today you'll get this many $, if we exit at 5x you'll get this many $ and if we have to do a downround you could be diluted to this many $. Such change is not unreasonable it's just the nature of it.
I think you miss the entire point of my comment. I am not suggesting that companies describe equity stakes in percentage or "you would make $x" terms (they can do neither), or that they provide anti-dilution protection to rank-and-file employees (it isn't going to happen). And while your assumption that nobody can afford to pay the tax on restricted stock grants is simply wrong, that's a different discussion.
Here's the bottom line: at a venture backed company, you will almost never know what your equity represents - in percentage or dollar amounts - until there's a liquidity event. As such, the value of the equity component of a compensation package should not be overestimated if you're a rank and file employee at a venture backed company. It should be treated like a lottery ticket because that's what it is.
It's designed to vest at the same rate that the employee adds value. For the sake of simplicity it's almost always set up to be four years with a one year cliff.
i.e. at month 11, the employee has no options, at the end of month 12 they have 25% of their options and then from there on in the options vest at the end of each month so that at month 18 they have 37.5% of their options. At the end of 4 years they have the right to buy all their options.
It can vary depending on the employee and what they negotiate upfront but unless they are bringing something that is of particular one-off value (a rolodex of clients for instance) there are not many reasons to change the standard 4+1 format.
Bravo Jessica! I think people here may be missing the crux of the article: building a real business -- rather than an initial product -- is quite expensive.
When you've first started out, you haven't generated a lot of value, even if you've got a plan, a great team, and an MVP. Your company just isn't worth very much at this point, which is why early-stage (angel) investors get large amounts of equity for very small amounts of money.
By raising a large amount of money at a low valuation, you limit your options for future financing, as you can only offer a smaller slice of the pie to future investors, and have to do it at a higher valuation in order to keep your initial investment team happy.
Whenever I see news about some startup raising $400K or something like that, I just can't think of what to do with this amount of money (in USA at least). It's so little. Good developers are expensive. Great developers are very very expensive. $400K can get you maybe 2 good developers + an accountant + crappy office space for a year + all kinds of expenses.
I agree. We're lucky to be building in a desirable but relatively cheap part of Florida (Gainesville, home to the University of Florida and Grooveshark, and in a state with no income tax) and $400k doesn't stretch very far. I can't imagine what it would be like building in the valley or NYC on that.
It depends really, if you don't expand and just work as cofounders willing the take just what they need to get by then that kind of money is going to last a long time. You are right if you are looking to hire full time employees though.
One of the major reasons some of the funding rounds are so big is that a large chunk of the money is going to buy equity directly from the founders rather than going into the company.
I've seen a couple of cases locally where founders took a bunch of money in the A round (specifically I'm thinking of Kik.) I guess I don't have much more than anecdotal evidence though.
Competent engineers are willing to get hired for what amounts to ~35k / year?
.... What?