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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.

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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.

Entrepreneurship

What Kills A Startup

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1 – Being inflexible and not actively seeking or using customer feedback

Ignoring your users is a tried and true way to fail. Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed. Tunnel vision and not gathering user feedback are fatal flaws for most startups. For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”

2 – Building a solution looking for a problem, i.e., not targeting a “market need”

Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure. Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing. “Companies should tackle market problems not technical problems” according to the BricaBox founder. One of the main reasons BricaBox failed was because it was solving a technical problem. The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.”

3 – Not the right team

A diverse team with different skill sets was often cited as being critical to the success of a starti[ company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”. In some cases, the founding team wished they had more checks and balances. As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.” Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe. Team deficiencies were given as a reason for startup failure almost 1/3 of the time.

4 – Poor Marketing

Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure. Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product. The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill.

5 – Ran out of cash

Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance. The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing:

The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash.

The old saw was that more companies were killed by poor cashflow than anything else, but factors 1, 2 and 4 probably are the main contributing factors to that problem. No cash, no flow. The issue No 3 – the team – is interesting, as if I take that comment ” I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made” and think about some of the founders and startup CEOs I know, I can safely say that the main way that any decision was made was by agreeing with them – it was “my way or the highway”. I don’t therefore “buy” the team argument, I more buy the willingness of the key decision makers to change when things are not working (aka “pivoting” – point 9).

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About the Author

This article was produced by Broadsight. Broadsight is an attempt to build a business not just to consult to the emerging Broadband Media / Quadruple Play / Web 2.0 world, but to be structured according to its open principles. see more.

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Callum Connects

Jasmine Tan, Director of Stone Amperor

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Jasmine saves her clients time and effort when doing kitchen fit outs with her biz Stone Amperor.

What’s your story?
I started working in the industry in 2003. I was in a marble and granite supplier company for 5 years. Even though I left the company, I still had customers calling me for my services. I referred them back to my previous company but they refused to because they loved the fast response service that I offered. I realised that customers do look at prices, however most of them prefer quality over quantity. Thus I have decided to establish a sole proprietor company also known as 78 Degrees which later rebranded as Stone Amperor in 2014.

What excites you most about your industry?
The kitchen countertop industry is a very confusing market. There are many brands, materials and prices to choose from. What excites me the most is my ability to help clients choose the best materials and brands within their budgets, whilst saving them time and effort.

What’s your connection to Asia?
I have been in Asia all my life and I love Asia. No matter where you go there is no place like home.


Favourite city in Asia for business and why?
I love Singapore. This is because Singapore has always been a stable country and it is great for doing business. However as it is a small country, it can be really competitive. I believe that if just do your best and give your best to your customers, you can overcome this.

What’s the best piece of advice you ever received?
“Take actions. Learn and improve continuously. An idea without action is just a dream.” This was really good advice that I received from my partner.

Who inspires you?
A very down to earth billionaire from Malaysia, Robert Kuok

What have you just learnt recently that blew you away?
Property is the foundation of every business.

If you had your time again, what would you do differently?
Own instead of renting property for my business.

How do you unwind?
I enjoy going shopping, watching movies and hanging out with friends. I am quite a simple being.

Favourite Asian destination for relaxation? Why?
I love going to Taiwan as I love the culture there. Everyone is so polite and the weather is great.

Everyone in business should read this book:
Sun Tzu, Art of war

Shameless plug for your business:
Perfect top, Perfect price, Perfect life from Stone Amperor

How can people connect with you?
Email me at [email protected]

Twitter handle?
@StoneAmperor

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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