Art of the Start-Up May 29 2012

May the Equity Packages Be Forever in Your Favor

By Joseph Walker

You've decided to join a start-up. You've gone through a rigorous interview selection process and have been deemed worthy of joining a small band of brothers dedicated to nothing less than ringing the Nasdaq bell and becoming millionaires many times over.

In the meantime, though, you've got bills to pay. So how do you navigate the trickier aspects of salary negotiations with your soon-to-be surrogate family? After all, these aren't some random human resource managers at a giant corporation who you will never have to deal with again.

To help, we've put together a simple guide to educating yourself on the finer points of start-up salary negotiations. Good luck and may the equity packages be forever in your favor.

Forget Titles

Start-ups are mission-driven entities. Most new ventures fail, so smart start-ups create a list of core values that they want employees to aspire to everyday. These values can maintain morale even in the darkest of times -- and there are many dark moments in the life of a start-up. When you miss revenue goals or a product flops, employees can take heart that they're remaining loyal to ideals they've vowed to uphold.

At Facebook, for instance, the company has five core values that include "Be Bold" (read: take risks) and "Build Social Value" (read: make the world a better place). But the company has other principles that it doesn't advertise. For instance, Chief Executive Mark Zuckerberg disdains titles, and he often expects new employees to take a title demotion when they join the company to prove that they're motivated by building great products, not status.

Failing to understand that cost one engineer $10,000 in 2008. Jeff Winter, co-founder of San Francisco-based recruiting firm Gravity People, had gotten an engineer, who had worked at Amazon previously, a great package: a base salary of $175,000, a $20,000 signing bonus, and 220,000 shares in the company, a stake that would been worth several million dollars at the time (and about 10 times more now).

It wasn't good enough. He wanted be appointed "director of architecture," and the best the company would do was "manager." The engineer went to meet with Zuckerberg and give his demand: I want to be a director.

"You're an architect at best," Zuckerberg told the engineer, according to Winter. Rather than give him the director's title, Zuckerberg made a new offer that included a $10,000 reduction to his signing bonus and a title of "architect" instead of "manager of architecture."

"Do you want it or not?" Zuckerberg asked.

The engineer took it.

Make It Count

While start-ups are more flexible and freewheeling than your typical corporation, at the end of the day they are still businesses with finite resources. Thus they budget how many people they plan to hire and how much cash and equity compensation they're willing to shell out for each. "It's not a negotiation as much as you think," says Andy Rachleff, a former venture capitalist at Benchmark Capital.

Which isn't to say that you can't ask for more than what the company offers, but you've got to pick what's most important to you. By the time you get to the offer stage with a start-up, the company has interviewed dozens of candidates and identified you as their top pick. They want to do what it takes to hire you, but they're also resource-constrained. So make a good case for why you deserve what you're asking for, and why it's important to you, says Joanna Bradley of recruiting firm Redfish Technology. Often times a bump in cash compensation may mean fewer stock options.

"Before you ask for more -- whatever 'more' is -- know what you're asking for," Bradley says. "If you're asking for a $10,000 bump in salary, make sure you say, 'If I get X, then I'm on board.'"

Understand Your Stock Options

It used to be that joining a start-up meant taking a big pay cut from what you could make at an established company. While the current tech boom has narrowed the salary gap between private and public companies, equity is still the name of the game when joining a start-up. Most tech veterans advise sacrificing cash for equity.

"Equity is what's valuable in a start-up. Half of a percent of Facebook vs. 0.4% is a $100 million difference," says Avichal Garg, co-founder and chief executive of San Francisco start-up Spool. "If you're going to take the risk of joining a start-up, go all the way and get as much equity as you can as early as you can."

The earlier you join a company, the bigger percentage equity stake you should be getting, says Rachleff, who is now chief executive of digital wealth management start-up WealthFront. The key, though, is to know what percentage of the company you own, not just how many shares you're being offered.

"One of the ways some companies take advantage of employees is by offering a large number of shares, but the number of shares don't matter," he says. "Only the percentage of the company that the shares represent matters."

To figure this out, you need to know how many shares the company has outstanding and divide by how many shares you've been offered. Rachleff wrote a blog post on the further ins-and-outs of understanding your equity package.

Know Your Value

There's no reliable database for knowing how much equity you should receive in a company or what the market rate salary is for your position. Websites like Glassdoor.com and Payscale.com provide some guidance, but are unscientific. You can also consult with friends and colleagues about what they're being paid, and that, combined with online sleuthing, should give you a sense of your fair market value.

Nothing succeeds, though, like success. At a time when any half-baked idea can get funded, you should be able to garner multiple offers from a few companies. This will give you leverage in negotiating for more money, equity or perks.

"The person who is a good negotiator isn't going to get any more from me unless she has great alternatives and I believe she has great alternatives," say Rachleff. "It's not a matter of negotiating skills; it's how badly do I want the person and do they have choices?"

Use Tact

If you do have multiple offers, you're probably evaluating which company has the best chance of making it. You'll be doing research on the company's executives and investors to see what their track records indicate about their chances of success, as well as analysis of the market potential of whatever product the company is selling.

Information like how much money the company has raised and what valuation investors gave it can be misleading in the frothy tech market of today. There's so much money being floated around that it can be difficult to determine who deserves the money they're getting.

So you'll want to draw information out of the company's executives during the interview process. You have to be careful, though, to not come across as someone who's just interested in a big payday.

"People who are shopping for the best offer make lousy employees because they're going to go shop for a better offer again in a few years," says Rachleff.

If you're working with a recruiter, mine them for information on the company. Is the start-up aiming for an IPO or an acquisition and how soon? If you've got to ask the company about this directly, do it in a roundabout way, says Bradley. For instance, you might ask, where do you see the company headed within five years?

Engineers often find it tricky to ask indirect questions. "They're trying to make a good decision with as much information as possible. They're computer scientists -- they dig into the details and make sure that things work," says Winter.

"People who aren't of that mind-set will be completely turned off and shut down and say this guy is going to be a management issue, when all they're trying to do is make an informed decision."

Write to Joseph Walker at Joseph.Walker@dowjones.com



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