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Do Startup Employees Earn A Lot?

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Since the average startup founder who makes it to Series A earns more than a large company employee, many believe that early-stage startup employees also earn more (albeit less than founders). Some have even claimed that startup early employees have better earnings prospects than founders.

We’ve looked at the data, and this does not seem to be true on average. There are strong reasons why people might want to work at a startup (e.g. career capital), and it’s true the employees of the most successful startups will earn more; but someone deciding between working at a startup vs. a bigger company should rarely be making the decision based on income. On average, startup early employees earn at most only a little more than developers at larger companies.

Three estimates of how much startup early employees earn, including both equity and salary

According to AngelList, early-stage backend developers, for example, generally get about $110,000 in salary and .7% equity (salary data from Riviera is similar).1

While the startup salary data is fairly clear, it’s hard to know how to value the equity portion of their compensation. Below are three different methods for doing so, which all show that developers at early-stage startups at most earn only a little more than they would at a large tech company.

1) Using average exit values

Let’s assume the 0.7% equity stake will eventually get diluted down to .35% at time of exit (a typical amount of dilution from Series A to exit). Average startup exit value is $240m, eight years into the life of the company. On an amortized basis, .35% equity is $105,000 per year.

On average, about 20% of companies that make it to Series A successfully exit, which makes the expected value of the equity portion $21,000 per year. This means that, in total, the average early startup employee earns $131,000 per year.

The average developer in Mountain View makes $106,000 per year, so the early startup employee has a 24% edge. However, it’s likely the early employees work harder, and are be more skilled than average. Rather than comparing averages to averages, it seems more accurate to compare startup employees with a more experienced subset of developers. A level II developer at Google in the Bay Area makes $150,000 per year, while a senior developer at Google makes $250,000 per year. From this perspective, if you’re turning down a job at a top company in order to work at a typical startup, then you can expect to earn less than similarly qualified and hardworking peers.

2) Using typical seed round valuations

A second way to estimate the value of early-employee equity is to use average seed round valuations. Early employees usually come in shortly after a seed round, and seed round valuations average about $5.3m. If you own .7% of the company at this time, then your shares are worth around $37,000. It’s unclear exactly how you should amortize this value, but this method again gives you a value in the low 5 figures.

3) Using estimates of founder exit value

A third method is to note that early-stage employees generally get between 1 and 5% as much equity as a founder (early stage employees will get usually .5-1% and founders, at the time they are giving out those large equity stakes, will have 20-50%).

Current research into startups found that founders average $1.4m per year, which means that the employee’s equity stake will be $14-70,000. Only the upper end of this approaches what engineers make at Google.

Wrapping up

These methods are all very rough, but taken together, they seem fairly compelling: on average early stage employees earn at most only a little more than a junior Google engineer.

This also fits with what we should expect if the market in developers is efficient. And it fits with my personal experience: I run a startup, and the developers I’ve hired have usually had similarly well-paid options at larger companies.


Responses and further discussion

In case you aren’t already convinced, I discuss below (i) some changes to securities laws which make the obscene payoffs of dot-com-boom startup employees unlikely to happen again, (ii) the argument that start up employees should get significantly higher compensation due to their risk and (iii) an argument that start up employees earn more than founders.

Option pricing changes

An additional complication to the estimates is that startups often issue equity as options, instead of as straight equity grants. During the dot-com boom days this had little impact: startups would set the strike near $0, so the value of the option was essentially the same as the value of the share.

In 2004, the SEC got wise to this practice and Congress passed the American Job Creation Act, which required companies to set the strike price of options at the fair market value. In less technical terms, this means:

“The equity portion of a startup employee’s compensation must legally be structured so that, if the options were exercised immediately, they would have a fair market value of $0.”

The fair market value isn’t always correct, but this is an additional hurdle for anyone who wants to get rich as a startup employee, and is a secret that most startups won’t tell you.

Risk aversion

One reason that people think startup employees should make more money than developers at large companies is because they bear more risk. Since the riskiness of entrepreneurship is part of the reason why entrepreneurs receive above market returns, it might seem that startup employees should analogously make significantly above market returns.

I think this argument is sketchier than it seems at first glance – a lot of the reasons why founders get paid so much have to do with the relationship between the founders and the investors, rather than risk per se. (Executives at any company with investors, large or small, will have a lot of golden handcuffs because the investors need to retain control of the executive team.)

Even taking the argument at face value though, startup employees don’t just bear slightly less risk, they bear a ton less risk. Therefore, they don’t need to be given higher compensation to offset the risk they assume.

Hall and Woodward give guaranteed income equivalents for founders who have various levels of risk aversion (as measured by CRRA). Guaranteed income equivalents are the amount of money the founder would be willing to take annually instead of founding the company and hoping for a higher, risky payoff years later. I used the same method to calculate guaranteed income equivalents for the hypothetical startup employee listed above who makes a guaranteed base of $110,000 and owns 5% as much of the company as a founder does:

Hall and Woodward list a CRRA of 2.0 as “reasonable”, and with that in mind, two things stand out about this table:

  1. For a “reasonable” person, it is better to be an early stage employee than to be a founder. This fits with advice given by people.
  2. Risk-neutral startup employees don’t have that much of an advantage over risk-averse ones. Among founders, a hypothetical risk-neutral employee with a CRRA of 0 gets an order of magnitude more value out of their founding than a “reasonable” person does. Among startup employees, it’s only about a 15% advantage.

Because there isn’t that much of a risk premium, we shouldn’t expect risk-neutral people (such as those primarily motivated by social impact) to get massively more value out of being a startup employee, even ignoring the empirical data listed in the previous section.

Can you just work at the best startups?

Some commentators have pointed out that the 100th employee at Facebook and dropbox both made more than the founders of billion-dollar companies. Arguably it’s easier to be the 100th employee of an amazingly awesome company than it is to be the founder of a good company, so even though the averagestartup might be worse than the average large company, if you seek out just the best startup you will do better than if you seek out the best large company.

If you can really pick the startups that will succeed better than average, then you’ll earn much more than average, and you should probably go do that.

But on average this isn’t possible. Moreover, it’s very hard to predict which startups will succeed, and easy to be overconfident in your skills. In hindsight being employee 100 at Facebook was a great idea, but how would you know at the time? Only a handful of VC funds seem to be able to pick winners with any amount of regularity, and even if this is due to skill instead of luck, the fact that the vast majority of experts whose full-time job is to choose winning startups repeatedly fail at this task should make us wary of assuming an engineer with minimal business understanding could succeed.

It goes without saying that you should investigate any prospective employer, and if you are considering working at a startup that due diligence process should include understanding their business model and chance of success, but it seems doubtful that you should expect massively above market returns.

Conclusion: What are startups good for?

I tell my prospective employees that compensation is approximately the same on expectation between big companies and small: a senior developer at Google will probably make about as much money as a senior developer at a startup. The difference is that startups enable you to move through the ranks much more rapidly: a skillful developer will move from “entry-level” to “senior” more rapidly at (some) startups than Google.

As with everything else about startups, there is no free lunch and you have to do your due diligence before joining a startup – many founders are running as fast as they can just to keep their company afloat, and have no time for helping their employees. Don’t work at those companies.

________________

About the Author

This article was written by a 80,000 Hours member, Ben West.

Did you enjoy it? Read more of Ben’s work, here.

Callum Connects

Benedict Heng, Founder of Mr. Farmer

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Benedict Heng is bringing back the ‘kampong’ days of having the Ho Liao (good ingredients) for Ho Jiak (good tasting) food.

What’s your story?
I’m Ben from Mr. Farmer. Mr. Farmer is an online grocer dedicated to supplying the freshest produce to our customers. We believe in sustainable and ethical farming. Since a young age, I have always been an avid food lover (especially meats), developing a strong interest in all things delicious. That is why I ventured into the F&B industry, working as a junior cook for 3 years.

Midway through my career, I made a move to the finance industry to pursue monetary rewards. I dove into high-risk investments and I made lots of money from these investments. However, the good fortune did not last long and all these came crashing down when I suffered a tremendous loss. This coincided with the time that I had just started my own family and it was a huge blow to me both materially and mentally. It was this crash that made me realize that this life wasn’t for me. I went on a hiatus and eventually, it was only through the strong support from my family that I managed to tide over this tough episode.

I went back to help the family business and this was how Mr Farmer came about. My family has been in the food industry for many decades and one thing they noticed from years of experience is that sustainable farming practices are not as developed as in Europe. This is why through Mr Farmer, we hope that we can provide the best quality products to families out there who want the best ingredients for their loved ones.

What excites you most about your industry?
Delicious and wholesome food excites me. I believe food is a critical component of life and it brings people together. The opportunity to serve the community with fresh produce for a healthy life, that brings me joy.

I feel that there is still so much more we can do to improve the quality of food and bring it to the masses. One of the key components of ensuring greater quality of food is to support ethical and sustainable farming. Due to commercialization and urbanization, most farming practices these days are no longer the way they were in the old “kampong” times. Shortcuts are taken, standards are compromised, all in the name of profit. At Mr. Farmer, profit is important too but we want to focus on the concept of One Welfare – sustainable farming directly impacts our health. Our vision is to bring back the ‘kampong’ days of having the Ho Liao (good ingredients) for Ho Jiak (good tasting) food.

What’s your connection to Asia?
I was born and raised in Singapore. I call Singapore my home as it’s where my family and close friends are. I also travel frequently to Malaysia and APAC for work.

Favourite city in Asia for business and why?
It’s definitely Singapore. There is just so much this tiny city can offer! Singapore has been globally recognized for its top-notch business environment providing its residents with developed infrastructure, political stability and excellent connectivity. These factors have given us an outstanding support system for businesses to strive.

What’s the best piece of advice you ever received?
Surround yourself with people that inspire you, challenge you to rise higher, make you better and, keep them in your life.

Who inspires you?
I draw inspiration from my uncle, who is the head of both the family and business. He takes care of our family matters at home and manages hundreds of employees at work. Handling both the family and business side of things can be tricky, but he has shown me that success can be sustainable and done with a conscience. His guiding philosophy of handling business and family is simply, to have a big heart.

What have you just learnt recently that blew you away?
Even just one day of separation from the day the meat is slaughtered, makes a world of difference to its flavour.

If you had your time again, what would you do differently?
I have come to learn that awareness is the beginning of everything. If I had my time again, I would have probably spent more time figuring out who I truly am and with that self-awareness, begun to lead my life with more purpose and meaning.

How do you unwind?
I like to spend my free time sipping white coffee at my favourite coffee place. I enjoy taking in the surrounding sights and letting my mind wander freely. It allows me to unwind and gain clarity at the same time. It also helps me organize my thoughts to prepare for the week ahead.

Favourite Asian destination for relaxation? Why?
It would be Bangkok as the people there are genuinely friendly and hospitable. They say people are what defines the city and I couldn’t agree more with this. I also enjoy the ‘laid back’ vibe of Bangkok. Not to mention Bangkok has all the good food and awesome shopping choices too!

Everyone in business should read this book:
“Spin selling” by Neil Reckham. It’s an amazing book that teaches you a process designed to help you successfully sell your products and services to business buyers.

Shameless plug for your business:
We at Mr. Farmer have the best tasting meats in Singapore, do a blind test and you will know why it’s Michelin chefs’ preferred choice. Not only are we very confident about the taste, we are also proud to say that all our products are chemical, hormone and antibiotic free. We also focus a lot on supporting ethical and sustainable farming practices believing in the ‘One Welfare’ concept. Do check us out if you enjoy good quality food like us!

How can people connect with you?
[email protected]

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started,
built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Zac Chua, Founder & CEO of The Kettle Gourmet

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Zac Chua’s popcorn business validated itself straight away and fast tracked him to the startup world. Zac now employs 11 people and shifts 500 bags of popcorn daily.

What’s your story?
It’s a crazy one. It was an accidental startup. If you think about it, no university graduate would ever dream of becoming a popcorn seller. We crashed our first tech event to validate our idea and it took off from there. I bought a logo for $7 from a designers marketplace, printed some cheap name cards, and built a 1 page landing page. Sales started pouring in and eventually, we were serving B2B clients (corporate pantries) and we have never looked back. Today we move about 500 bags daily, we have 11 employees and we are growing. Talk about a validation that worked in our favour.

What excites you most about your industry?
It’s food! Everybody loves food! In Singapore the F&B scene is brutally competitive and it spurs me on to fight and compete for market share and to prove to myself that I can do it. It keeps me going and I won’t stop until we become the market leader.

What’s your connection to Asia?
I was born in Singapore, and have traveled to most of Southeast Asia.

Favourite city in Asia for business and why?
Singapore! Even though Singapore has a high cost of living, the Government is actually very supportive of startups. They provide grants for us to tap into, and the technological infrastructure makes it possible for us to compete on a global scale. I believe if you can succeed in your business in Singapore, you can succeed in most of Southeast Asia.

What’s the best piece of advice you ever received?
You only need to be right once, and the rest is history.

Who inspires you?
My father, who was a VC. In fact he was the one who gave me the best piece of advice which I shared above. Having one successful exit, he showed me that it’s okay to fail a million times – all it takes is just one time for you to win in business and in life.

What have you just learnt recently that blew you away?
The power of compounding.

  • Mary and John are the same age.
  • Mary saves $2k annually from the age of 19-25 – so she puts $14k into her portfolio
  • John saves $2k annually from the age of 26-65 – so he puts $80k into his portfolio, but 7 years after Mary.
  • If both are able to generate 10% per annum, who would have more at age 65?
  • John of course! But how much more?
  • Mary will have $944,641 whilst John will have $973,704
  • Think about it! Mary puts in only $14k but John delays for 7 years and puts in $80k.

CRAZY RIGHT!?!?

If you had your time again, what would you do differently?
Nothing, my mistakes taught me how to become a better me. But if I really must choose, I’d say take more time to find the right business partner.

How do you unwind?
Poker, Mahjong and Dota 2.

Favourite Asian destination for relaxation? Why?
Vietnam! Things are cheap, people are warm and friendly, and their coffee fills up my life. I would love to retire there if possible.

Everyone in business should read this book:
The richest man in Babylon

Shameless plug for your business:
We don’t need a plug. Just try our competitors and you’ll understand why!

How can people connect with you?
Facebook: https://www.facebook.com/chuazongyou
LinkedIn: https://www.linkedin.com/in/zacchua

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started,
built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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