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Startup Stock Options Are Not Reliable Compensation

the bull

Wouldn’t you like to be one of the lucky people who joined Google and Facebook when these were startups, and now be a multi-millionaire? So people ask me, “How many shares should I ask for when I join a startup today?” In reality, the number of shares doesn’t mean anything – it’s your percent of the total that you need to negotiate.

For example, 200,000 shares may sound like a lot, but if the startup has issued 20 million (a common starting point), that’s just 1% of the company. By the way, you will normally only be offered “options,” which vest over a 4-year period after a 1-year “cliff.” That means you will get none of these until after you work for one year, and the total only if you stay for four years.

Plus, you have to remember that these 200,000 shares could still be worth nothing in four years, depending on the “strike price” today as compared to the market price four years from now. Many employees forget that there isn’t even a market for stock until after the company has gone public, which hasn’t happened positively to many companies in the last few years.

Thus, stock doesn’t “pay the mortgage” today, so to speak. Unless you have a sizable nest egg, or a working spouse with an income to support you, I would recommend that you consider any stock options as a “potential bonus,” rather than a key part of your compensation for joining a startup.

With all that said, here are some “rule of thumb” guidelines on what might be a reasonable offer, as extracted from an old article by Guy Kawasaki, and based on discussions I hear rattling around the investor community.

  • CEO brought in to replace the founder: 5 – 10%
  • CTO, CFO, VP of Marketing or Sales: 1.5 – 3%
  • Chief Engineer or Architect: 1 – 1.5%
  • Advisory Board Member: 1%
  • Senior Engineer: .3 – .7%
  • Product Manager: .2 – .3%

If you are not on this list, just worry about getting whatever your peers are getting. It never hurts to ask in a job interview what stock options are available, and don’t fall for the offer which promises to “work out the equity terms later.”

Obviously, what you get will vary depending on what you bring to the company and what the market will bear. The numbers I mentioned don’t have a level of precision that can be associated with a particular geography or business type. Offers near the high end of a range will come with a lower cash salary, maybe even 50% of the going rate.

Any offers of equity compensation before the first round of institutional capital should be considered purely speculative. You should also assume that your percentage will go down through dilution as the company raises additional rounds, and offer sizes will go down as the company grows.

Your compensation is the total package of stock, plus salary, plus benefits. At best, you should view stock as “deferred compensation” or a “bonus,” which has no value today, and a risk for the future that is much higher than mutual funds or a conventional balanced public stock portfolio. Yet it has been a source of great wealth to a tiny percentage of people.

Couple all this with the fact that working at a startup is much tougher than working at bigger companies – despite all the hype you see about startups which provide free food, foosball tables, and totally flexible hours. Generally, less structure means more stress, and fewer people means higher expectations, longer hours, and a job that may be gone tomorrow.

The bottom line is that you shouldn’t even think about joining a startup, stock or no stock, unless you believe in it and are ready for the adventure of your life. It will always be a learning experience, but it may be a bumpy ride to nowhere. It’s a huge gamble. How many gamblers do you personally know that have won big?

Reprinted by permission.

Image credit: CC by emilio labrador

About the author: Martin Zwilling

Martin is the CEO & Founder of Startup Professionals, Inc., a consultancy focused on assisting entrepreneurs with mentoring, business strategy and planning, and networking.

Martin for years has provided entrepreneurs with first-hand advice, mentoring and business plan assistance as a startup consultant. He has a unique combination of business and high-tech experience, and executive mentoring and connecting startups with potential investors, board members, and service providers.

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