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Startup jobs: Weighing equity vs. income
Deciding whether to take a job working for a startup company is a decision that can lead to fabulous riches or years of wasted effort with little to show.
In short, it's a high risk decision.
So what factors must be taken into account when working out how to take an offer?
This article lists six questions you should ask yourself before considering any job offer - to help ensure you get a fair deal and make the right decision.
1. Do you believe in the idea?
This question gets pride of place at the top of the list because I think that, money aside, you need to look for work that is meaningful to you. Something you can be passionate about.
It's difficult to stick with an early stage enterprise during the tough times if you aren't dedicated to making it work. All businesses go through rough patches, and you might end up leaving at the wrong time.
A great example of this is Ronald Wayne who sold his 10% stake in Apple for $800. Those shares would be worth nearly $44 billion today.
Ok, so there's no way he could have known quite how well Apple would do, but he lost out because he clearly didn't believe in the business.
If the idea is something you can honestly get behind 100%, then look for a higher share of equity.
2. Do you want to work with these people?
One of the things I've learned is that it is far better to base decisions on the:
- caliber and quality of the people you are getting into bed with
- interest and appeal of the business and the work involved
Working with great people is generally far more advantageous than squeezing an extra few percent or dollars out of bad ones.
3. How stable is the company?
Having a great idea is one thing. Turning it into a successful and profitable business in the medium to long term is entirely another thing.
If the startup is nothing more than an idea on a drawing board, then your risk is high because there is a greater chance of failure.
Higher risk should come with higher associated rewards, so you'll want to leverage that to gain a better equity share.
But what if the startup already has funding and a stable stream of revenue?
A venture that is already operating successfully is far more stable. The founders have already taken the gamble and risked a lot. Your risk is now lower and so your bargaining power is similarly diminished.
On the other hand, a stable company can afford to pay you a decent salary. This means that you can negotiate to offset a lower equity share in consideration of better wages.
4. What is a sustainable income?
More often than not, when negotiating a startup package, there is a balancing act between equity and income.
The startup may be prepared to offer a higher stake in the company in return for lower salary (especially since human resources often represent the largest share of operating costs).
Don't go after equity too aggressively without considering the basic monthly amount required to keep you comfortable. It'll make life very difficult if you can't make ends meet each month.
In general, make sure the agreed wages are at least enough to cover living costs, plus a bit extra for unforeseen expenses.
5. How important is your contribution?
When working out what is a fair offer in terms of shares, it may help to look at the value you bring to the table.
Remember that company founders need to hold onto as much equity as they can because they'll need it later down the line to attract investment, etc.
This means that their default equity offers tend to come in low. It's not that they necessarily undervalue you, it's more a case of trying to be prudent about the future.
So, if you represent the all skills and knowledge they need in order to launch, then your bargaining position is strong. If what you bring is readily replaceable, then you're weak.
Make sure you take into consideration how much work and investment is going on outside of your sphere of influence before asking for too much and potentially souring the deal.
6. What is your risk appetite?
It's crucial to lend some weight to your personal circumstances. Have you just got married? Do you have a kid on the way?
What type of risk are you after? How bad would it hurt you to fail?
Negotiating aggressively for a larger equity share might bring greater profits down the line, but wouldn't a lower share with a higher monthly salary improve your personal life immeasurably?
Remember that there is no point in exposing yourself to such great risk of complete failure that you aren't able to recover.
Part of being successful is failing often enough to learn enough to eventually succeed. But you can't do this if you fail too big.
Spend some time understanding your own situation before you even think of negotiating an offer. Being introspective and self-reflective might produce results that surprise you and help you make a much better life decision.
So those are the questions that I ask myself whenever I am faced with an offer to become involved in a new startup. What else do you take into consideration?
Share your thoughts and tips in the comments.
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