Negotiating Compensation for a Job at a Startup

Negotiating Compensation at a Startup

Startup jobs -- where you’re given stock in a new company in exchange for working for a low or even no salary -- are like a gambling trip to Las Vegas. Most people won’t come out ahead, but those who know how to play the game can sometimes win big. 

The company’s business plan, a competent leadership team and the right compensation package can each reduce the risk of working for a startup.

There’s no shortage of startups to work for, but most are going to fail, says Greg Carney, who, after working for a series of startups, is now director of consulting for Miami engineering firm Carney-Neuhaus. “My guess would be one in 20 really hits it substantially and one in five continues at all,” he says. “If you’re working for a startup and your compensation is dependent upon the company doing well, you’re taking a significant risk.”

Evaluate the Business Plan and the Leadership

Reduce your risk by evaluating the startup’s business plan, says Ian Ide, New York technology division general manager for Winter, Wyman & Co. “It’s fair for someone to ask a potential employer: How do you make money? What’s your revenue stream? When do you expect to be profitable? What’s your exit strategy?”

If you aren’t able to judge the company’s financial viability, ask your accountant or a friend with an MBA to vet the company’s financials for you.

Think the business plan is a winner? Look at the track records of the company’s leadership and any investors. “Have they had successes in the past, or is this the first time they’ve done a startup?” Ide says.

Having venture capital support means a company’s business plan has impressed professional investors, so there should be enough cash to launch the operation -- and pay your salary.

Understand Compensation

Many new ventures are cash-poor, but if a company can’t pay you at all, proceed cautiously. “The only time that you should be willing to take all equity and no cash compensation is at the very earliest stage of a startup, and only if you are positioned as a founder with similar rights as the other founders, including those putting up the initial funding,” Carney says.

Those rights might include a seat on the board, voting rights, getting bought out when the founders are or stock antidilution protection.

If there’s no plan to pay you a salary within six months, it’s unlikely the business will ever find sufficient funds to accomplish its mission, Carney warns, so proceed only if you don’t need an income.

Run from deals where you’re asked to forgo salary and contribute funds unless you completely trust those starting the company. “It’s too easy to get stuck in a situation [where] they can come back to you for more capital,” Carney says. “And if you don’t pony up, they take your equity back.”

All Equity Is Not Alike

Pay attention to the kind of stock and options you’re being offered, and, if you can, find out how your options compare to the total shares available, Ide says.

Stock grants mean you own the stock outright and can sell it after it vests and receive 100 percent of the sales price, he says.

Stock options mean the company agrees to sell you stock at a set price in the future. If the company loses value, your options may be worthless. If the stock rises, you make money.

The vesting schedule -- the plan that outlines when you get the stock -- is also important, Ide adds. If you leave the job, or the company is sold or goes bankrupt before you’re vested, you may get nothing.

Ways to Lose

Anyone smart enough to set up a new company is also probably smart enough to find a way to keep all the profits. “Some of these people are sharks who may give you something that sounds wonderful up front, but then later they can significantly dilute your ownership,” Carney says.

Stock-option taxes are complicated (you could even owe tax on options you can’t sell), so talk to your accountant before you accept an offer. “If possible, get something from the company saying they will make you whole if the Internal Revenue Service changes its rules on noncash income,” Carney says.

Protect yourself by getting a detailed compensation contract that covers scenarios such as a buyout, substantial investment in the company by a third party, bankruptcy and intellectual property you develop.

Do You Have Passion?

The most important factor to consider when you’re offered a job at a startup isn’t finances -- it’s passion. “Anyone taking the job solely for the options is making a mistake,” he says. “If this is something you’re excited about and the compensation is structured in a way that it’s still enticing, then it’s the right job.”