Why do we turn up for work? Why do we burn that midnight hour trying to breath life into an invisible start up?
Altruism, the craic or just those (soon to be restricted) free beers from the We Work fridge?
Maybe for you it’s some or none of the above but, what it should be is a project that is a mixture of challenging, intellectually stimulating and ultimately, rewarding.
Ah, yes, the filthy lucre which let’s face it (despite all those who say “I’m in it to change the world”) is normally the driving force as you seek a handsome reward after, to offset the financial pain during.
If you’re in or aiming for a senior role with a start up, then the balance act of Salary vs Equity vs Time will be taking place.
Start ups can be horrible beasts, as they expect you to give your life for the party and survive on little more than fresh air. In those circumstances, how do you measure the value of your time and the opportunity cost of what you might be losing today versus, the promise of jam tomorrow?
Not everyone likes to discuss salary and part of this is down to the fact that not everyone has a clear view about their value.
Within that world you left behind – the one of stability and benchmarked salaries – ‘rewards’ for your work tend not to have so much pressure, uncertainty and anticipation surrounding it, in the way it will within an early stage company.
Within this environment, there is often pressure to work for below market salary on the basis it’s an exciting place to work, the product is going to change how people do X and ultimately, that everyone is working towards that hoped for exit.
It’s particularly the case with the senior roles within a growing, but cash poor business where management of cashflow is the omnipotent challenge. If you’re growing fast, you will always be on the verge of running out of money.
CEO and senior team will spend large chunks of their time spinning plates, trying to raise money and micro forecasting where to spread that thin cashflow, particularly in a project with high burn rate and sluggish sales (most of them!).
Staff salaries always take priority which means the senior team take any hit when it comes to the level (and regularity) of remuneration. They’re likely to already being paid well below market rate and if you’re going to be CTO in a company like this, you will be part of that painful mix and managing the impact on your personal cashflow.
No-one said running a start up was easy!!
Incentivizing talented people with the aforementioned promise of jam tomorrow, is where equity and stock options come in.
But equity is essentially valueless at an early stage so the challenge is in finding a balance between your market rate vs. the potential reward accruing further down the line.
In terms of equity, quite often it will be delivered via a vested share mechanism, being related to how long you’ve stayed in the company.
Initial consideration is that there will be an offer/negotiation of what the equity stake could/should be and your calculation is to balance that medium term opportunity vs. the immediate hit on salary now.
What too many founders and early hires do, is sacrifice too much in salary hit, to chase that start up dream. Student debt ain’t got nothing on start up debt.
If they can’t meet your basic salary expectations, think very seriously before accepting the role.
Second part are the shares themselves.
You need to investigate whether that company is going to be worth something in the future.
In terms of vesting, let’s say you’re offered 3% vested over 3 years. That’s likely to be 1% released at the end of each year, for three years.
Good news is that those are your shares. They can’t grab them back, once you’ve got them. That’s if they’re worth anything!
When negotiating equity, you need to find out more about the company.
What is the product?
What stage in the development life cycle are they?
What is the prospect of that company actually delivering a return on that equity stake?
What funding have they received and what equity have they made available to others?
Accepting a large slug of equity from an overly optimistic CEO, might lead to unhappiness if the realistic prospect of a lucrative payday are slim which (to be brutally honest) with most start ups is likely to be the case.
And your rational decision making must take into account the value of time, often overlooked within the excitement and ebullience of managing and/or joining a fast growth company.
How do you value your time, opportunity cost and the risk of damage to other parts of your life whilst submerged in this exciting but perilous venture?
Timelines can also be impacted by the sector.
Some sectors can see astonishingly quick growth spurts, consolidations and exits, whilst others require a significant amount of time and traction before acquirers and paydays come knocking on the door.
Get under skin of that opportunity.
Market intelligence. Gut feel. Company research. It’s about understanding your value and conducting some thorough research. As an example, Glassdoor is a good source of research into company culture and pay.
More detailed analysis about the realities of start up salaries, can be found here.
If you want to know more about being a CTO, you can do worse than check out this article ‘Everything you might want to know about a CTO‘ and/or downloading our free eBook ‘94 tips on how to become CTO fabulous‘
Before you go, why not treat yourself to a review of our online management skills courses.
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