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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

Malcolm Tan, Founder of Gravitas Holdings

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Malcolm Tan is an ICO/ITO and Cryptocurrency advisor. He sees this new era as similar to when the internet launched.

What’s your story?
I’m a lawyer entrepreneur who owns multiple businesses, and who is now stepping into the Initial Coin Offering/Initial Token Offering/Cryptocurrency space to be a thought leader, writer (How to ICO/ITO in Singapore – A Regulatory and Compliance Viewpoint on Initial Coin Offering and Initial Token Offering in Singapore), and advisor through Gravitas Holdings – an ICO Advisory company. We are also running our own ICO campaign called AEXON, and advising 2 other ICO’s on their projects.

What excites you most about your industry?
It is the start of a whole new paradigm, and it is like being at the start of the internet era all over again. We have a chance to influence and shape the industry over the next decade and beyond and lead the paradigm shift.

What’s your connection to Asia?
I’m Singaporean and most of my business revolves around the ASEAN region. Our new ICO advisory company specialises in Singaporean ICO’s and we are now building partnerships around the region as well. One of the core business offerings of our AEXON ICO/ITO is to open up co-working spaces around the region, with a target to open 25 outlets, and perhaps more thereafter.

Favourite city in Asia for business and why?
Singapore, since it is my hometown and most of my business contacts originate from or are located in Singapore. It is also a very open and easy place to do business.

What’s the best piece of advice you ever received?
Be careful of your clients – sometimes they can be your worst enemies. This is very true and you have to always be careful about whom you deal with. The closest people are the ones that you trust and sometimes they have other agendas or simply don’t tell you the truth or whole story and that can easily put one in a very disadvantageous position.

Who inspires you?
Leonardo Da Vinci as a polymath and genius and leader in many fields, and in today’s world, Elon Musk for being a polymath and risk taker and energetic business leader.

What have you just learnt recently that blew you away?
Early stage bitcoin investors would have made 1,000,000 times profit if they had held onto their bitcoins from the start to today – in the short space of 7 years.

If you had your time again, what would you do differently?
Seek out good partnerships and networks from day one, and use the power of the group to grow and do things together, instead of being bogged down by operations and going it alone from start.

How do you unwind?
I hardly have any time for relaxation right now. I used to have very intense hobbies, chess when I was younger, bridge, bowling, some online real time strategy games and poker. All mentally stimulating games and requiring focus – I did all these at competitive levels and participated in national and international tournaments, winning multiple trophies, medals and awards in most of these fields.

Favourite Asian destination for relaxation? Why?
Phuket – nature, resort life, beaches, good food and a vibrant crowd.

Everyone in business should read this book:
Rich Dad Poor Dad by Richard Kiyosaki

Shameless plug for your business:
Gravitas Holdings (Pte) Limited is the premier ICO Advisory company and we can do a full service for entrepreneurs, including legal and compliance, smart contracts and token creation, marketing and PR, and business advisory and white paper writing/planning.

How can people connect with you?
Write emails to [email protected], or [email protected]

Twitter handle?
@malcolmABM

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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Entrepreneurship

Women on Top in Tech – Pam Weber, Chief Marketing Officer at 99Designs

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

Pam Webber is Chief Marketing Officer at 99designs, where she heads up the global marketing team responsible for acquisition, through growth marketing and traditional marketing levers, and increasing lifetime value of customers. She is passionate about using data to derive customer insights and finding “aha moments” that impact strategic direction. Pam brings a host of first-hand startup marketing experiences as an e-commerce entrepreneur herself and as the first marketing leader for many fast-growing startups. Prior to joining 99designs, she founded weeDECOR, an e-commerce company selling custom wall decals for kids’ rooms. She also worked as an executive marketing consultant at notable startups including True&Co, an e-commerce startup specializing in women’s lingerie. Earlier in her career, Pam served in various business and marketing positions with eBay and its subsidiary, PayPal, Inc. A resident of San Francisco, Pam received her BA from the University of Pennsylvania and MBA from Harvard Business School. Pam is a notable guest speaker for Venture Beat, The Next Web, Lean Startup, and Growth Hacking Forum, as well as an industry expert regularly quoted in Inc., CIO, Business News Daily, CMSwire, Smart Hustle, DIY Marketer, and various podcast and radio shows. You can follow her on Twitter at @pamwebber_sf.

What makes you do what you do?
My dad always told me make sure you choose a job you like because you’ll be doing it for a long time. I took that advice to heart and as I explored various roles over my career, I always stopped to check whether I was happy going to work every day – or at least most days :). That has guided me to the career I have in marketing today. I’m genuinely excited to go to work every day. I get to create, to analyze, to see the impact of my work. It’s very fulfilling.

How did you rise in the industry you are in?
I had a penchant for numbers and it helped me stand out in my field. This penchant became even more powerful when the Internet and digital marketing started to explode. There was a great need for marketers whose skills could span both the creative and the analytic aspects of marketing. I capitalized on that growth by bringing unique insight to the companies I worked with, well-supported with thoughtful analysis.

Why did you take on this role/start this startup?
I’m not sure this is relevant to my situation as I had been a marketing leader in various start-ups and companies. I took on the role at 99designs because I was excited by the global reach of the brand and the opportunity the company had to own the online design space. I especially liked the team as I felt they were good at heart.

The challenge I’ve faced in my time at 99designs is how do I evolve the team quickly and nimbly to address new challenges. The work we do now, is very different than the work we did a year ago and even the year before that. There is a fine line between staying focused on the goal ahead and being able to move quickly should that goal shift.

Do you have a mentor that you look up to in your industry or did you look for one or how did that work?
There is no one I’ve sought out or worked with over my entire career as my “mentee” needs have changed so much over the years. There are many people who have helped me along the way. For example, one of my peers at eBay, who was quite experienced and skilled in marketing strategy and creative execution, taught me what was in a marketing plan and how to evaluate marketing assets. As I have risen to leadership positions over the years, I often reach out to similarly experienced colleagues for advice on how they handle situations.

How did you make a match if you and how did you end up being mentored by him?
I learned early in my career that it rarely hurts to ask for advice. So that is what I have done. Additionally, there are people that are known to be quite helpful and build a reputation for giving back to others in advisory work. Michael Dearing, of Harrison Metal and ex-eBay, is one of those people. I, as well as countless others, have asked him for advice and guidance through the years and he does his best to oblige. Finding mentorship is about intuiting who in your universe might be willing and whether you are up for asking for help.

That being said, generally, I have found, if you are eager to learn and be guided, people will respond to the outreach.

Now as a leader how do you spot, develop, keep, grow and support your talent?
I generally look for a good attitude and inherent “smarts”. A good attitude can encompass anything from being willing to take on many different types of challenges to working well amongst differing personalities and perspectives. Smarts can be seen through how well someone’s done in their “passion areas” (i.e. areas where they have a keen interest in pursuing).

I try to hire those types of people because in smaller, fast-growing companies like many of the ones I’ve worked in, it’s more often than not about hiring flexible people as things move and change fast.

Once those people are on my team, I try to keep them challenged and engaged by making sure they have varying responsibilities. If I can’t give them growth in their current job or in the current company, I encourage them to seek growth opportunities elsewhere. I’d rather have one of my stars leave for a better growth opportunity than keep them in a role where they might grow stale.

Do you consciously or unconsciously support diversity and why?
I consciously support diversity. When I am hiring, I am constantly thinking about how to balance the team with as broad a range as possible of skill sets, perspectives, etc. to ensure we can take on whatever is thrown at us, or whatever we want to go after.

What is your take on what it takes to be a great leader in your industry and as a general rule of thumb?
I’m going to assume a great leader in my industry to mean a marketing leader in a technology company. I think a great leader in this industry is not afraid to learn new tricks no matter their age – it’s the growth mindset you may have heard about. I have a friend who inspires me to do this – she purchased the Apple Watch as soon as it was available, and was one of the first people I knew to use the Nest heating/cooling system. She’s not an early adopter by most definitions, but she adopts the growth mindset. This is the mindset I, too, have sought to adopt. In my field of marketing, it most recently has meant learning about Growth Marketing and how to apply this methodology to enhance growth. Independent of your industry, I think a growth mindset serves you well.

Advice for others?
I have been at 99designs for 3.5 years. During that time we’ve invested in elevating the skills and quality of our designer community, we’ve rebranded to reflect this higher level of quality, and have improved the satisfaction of our customers. Our next phase of growth will come from better matching clients to the right designer and expanding the ability to work with a designer one-on-one. We have the best platform to find, collaborate, and pay professional designers who deliver high quality design at an affordable price, and it’s only going to get better. I’m excited to deliver on that vision.

Pam Webber
Chief Marketing Officer of 99designs
Twitter: @pamwebber_sf

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