Working in a startup is an exciting proposition for many. While a majority of us prefer the comfort of a cubicle in an established company, there are others who would jump in glee at the prospect of working in a startup. The challenges one faces in a startup, along with the promise of multi-million exit, in case the startup goes public or is bought by some Microsoft or Apple, makes it a sensible thought.
If you are one of those who is recently interested in switching over to a budding startup or have an offer in hand and don’t know which way to go, this post will help you in making the right choice.
We all know how the work culture of a corporation bears little resemblance with that of a startup. Thus, it would be sensible to deduce that there will be a number of points on which an offer from a newly setup company would differ from that of an established brand.
If you are careful enough to notice, you would find equity compensation a huge talking point among those working in the startups. What is this equity compensation? Why does it matter? What else should you consider while negotiating an offer from a startup?
The least understood component of a startup job offer should be discussed first. Especially employees who have little background in finance have major issues in comprehending the specifics related to equity compensation. Equity valuation can be difficult at times and therefore requires a sound understanding. Here are few points to consider while evaluating the equity offered to you:
1.) How much of your total compensation is in equity?
A seed-stage company which has little cash would prefer a larger part of employee compensation in equity, for obvious reasons, as compared to a startup which has successfully completed its Series C funding. In the end of it all, depends on how comfortable are you with this kind of arrangement.
2.) Type of equity compensation
Equity is awarded in various forms. Some grant restricted stock options while others award Incentive Stock Options (ISOs). Restricted stock plans involve sale or allocation of company stocks to employees where employees do not have to pay anything to the company. ISOs are more common. Under this, the company offers employees an option to buy stocks during a specific period of time for a specific, predetermined price, also known as the strike price.
To maximize benefits, employees can sell these stocks when they are worth more than their strike price, subject to different terms and conditions. It sounds complicated and it indeed is a grey area, but one thing is clear, is that restricted stocks are better than ISOs. You can take help of an expert friend who has experience with startups to understand the same.
3.) The total worth of the company that your stock options represent
Getting 20,000 stock options in the offer letter might seem a lot at first. However, this offer is of little consequence until you know how much value of the company these stock options hold. 20,000 wouldn’t mean much in a big company with 50,000,000 shares outstanding. On the other hand it is an attractive offer if the company has only 100,000 shares outstanding.
4.) Vesting schedule
Another complex vernacular that one hears while discussing a startup offer is vesting schedule. The standard 4 year including a 1 year cliff vesting schedule is followed in most startups. Under this arrangement, the company gives you the promised stock options or equity as you spend more time on it.
Generally it takes one year for 25% of your stock options to get vested, followed by a monthly vest over the duration of next 36 months. This way, both the interests of the company and the employee remain protected as startups do not have to worry about people running away with the equity. Check this point thoroughly in your offer letter. Ask if early vesting is allowed. Sometimes, vesting of Restricted Stock Units is tied with company’s IPO or successful exit through acquisition.
While discussing the monetary part of your compensation, (read monthly salary), there are few points to keep in mind. There is no reason why you should take a big pay cut just because it is a startup. Focus on keeping the salary as high as possible, because that’s what will pay your monthly bills.
Back up your case with proper facts, like the current value of your profile in the job market, peer salaries and other research material. Also, keep reiterating your commitment towards company’s growth and its vision. Negotiations should not be a like a personal war, it is an art and you should be adept enough to make sure the HR also walks away feeling satisfied.
Perks and Benefits
Startups are trying every trick in the book to lure in experienced professionals from bigger corporations. Whether it is highlighting their ‘open’ work culture or doling out unmatched perks such as free lunches, paid vacations, flexible timings, and telecommuting to work.
It is for you to decide whether these fringe benefits are of any real value to you. In the long term, these facilities do make a difference. Plus, you can apply your negotiation skills here also and extract one or two benefits extra from the employer.
Long Term Potential and Associated Risk Factor
The final decision should always be based on the current financial health of the startup, its future plans and potential. While joining a bootstrapped startup is riskier as compared to a well funded one, you should observe due diligence in both cases. Go as far as possible to research about the history of the company, and their founder’s profile. An offer is as good as the company and its leaders, especially in the risk-manifested startup economy.
Saurabh Tyagi is a blogger and a professional career author with proven expertise in topics related to jobs, job trends, different career opportunities, workplace tips and strategies. His articles are particularly aimed towards making the job search experience of the millennials less tedious as possible.
Next read: Pros and Cons of Working for a Start-Up: What to Expect and Not to Expect on Job?