Some of the realities, About start up salaries

As a rock star developer, what are your career (remuneration) options?

• An above average salary at investment bank or hedge fund, but with long hours and little control
• Public body where, you earn less, but the hours and benefits (particularly those juicy pensions) are better and more comforting
• Large company where you benefit from the corporate perks but, suffer from the politics and risk being lost in mediocrity or …
• The crazy, unpredictable world of start ups and fast growth companies where you have few corporate perks, lots of ping pong, too many potential downsides but, boy oh boy you will have control, direct input, bags of fun (at least during the growth phase) and for sure, you’ll be guaranteed the sharpest of learning curves.

But, if it’s the start up world that turns you on, then you will likely be faced with the prospect of working at a below market rate and having to grapple with the challenge of how they value your work and importantly, how you value yourself?

What are the realities, about start up salaries?

If you are a founder then you will (or you better) have a significant stake in the company and therefore, exit and control is the major upside.  But make sure there is a realistic prospect of that exit and reward, and fail fast rather than drag out your time with a twitching corpse.   So many founders fail to measure and understand the value of time ….

But what if you are joining a company, and they want to offer you a lower salary but with the tantalising prospect of share options?  How do you value and measure whether it’s a good deal or not?  Whether it’s properly valuing your skills, input and time?

Here is a postage stamp calculation for you to start calculating whether their proposal is worthwhile or worthless.  Sufficiently incentivised or taking the p**s.

The information you need to guesstimate;

• When is exit likely to happen?
• Are they likely to sell within 3, 5 or 10 years?
• Do they have a clear exit strategy and/or target buyers from the beginning or are they building something piecemeal?
• You need to get a sense – from the founders, investors, market – whether an exit is realistic or pie in the sky.
• What is the likely percentage that you’ll own?

Depending on where the company is in its journey, but be aware your initial offer of X% is likely to be diluted during future rounds – this can be good or bad.  If it’s a dilution because the company is going gangbusters and the valuation is sky rocketing, then dilution might be a positive thing.  If the company is struggling and it’s about bringing new people in at a relatively static valuation, then dilution could have a much more negative impact on the eventual reward, for your risk.

• Check whether you have to pay for the share options you exercise?
• It may be a nominal sum or, it may £000’s and If so, how/when will you raise the money?
• Is there a tax that you will need to pay when buying or selling?

In addition, the value you need to add to your salary is the net present value of the cash at exit, divided by the number of years.

An example;

1.  Start up has offered you £60k plus 5% options over a 5 year period;
2. Business aims to exit in 5 years at £20m valuation, after rounds of finance, estimate your eventual holding at 2.5%
3. This means your expected cash at exit is £500,000 but, you need to pay 10% tax on profit and £10,000 for the shares.
4. Actual cash is £441,000
5. Assume inflation at 3%, this will mean that in today’s money it’s £370,000 (£74,000 per year)
6. Add that to the salary, then it is the equivalent of receiving an annual salary of £134,000

Let’s say, you are currently worth £100,000 in the market place.

The upside of the equity structure example above will be £34,000 pa but, with a potential loss of £40,000 pa.

In this case, that’s worse than a coin toss!

Is the risk worth it to you?
There are other considerations to take into account such as the experience, responsibility earlier and possibly working within a new sector and alongside a fantastic team.  All of which – depending on the stage of your career – bring potential upsides, over and above the financial gain.

The significant downside is the risk of realising those shares as well as the time you need to devote to the company to gain the shares.  The reality is that only a small % of start ups achieve significant exits, indeed the majority of start ups fail before they find an acquirer. Interesting tech crunch article here, on “How likely is your start up to get acquired“.

Ultimately it’s a personal career choice and as mentioned above, working within an exciting and fast growth start up will bring many other benefits but, be aware of how start ups try to negotiate your reward, how uncertain the market will be and how realistic your CEO and founders are being about exit.

If interested in finding out more about this important subject, subscribe to CTO Academy as we will be using future blogs to look in more detail at different share option structures.

We also offer our students, free hangout sessions where our experienced team discuss equity structures and answer questions.

Please note, this is not meant to be financial advice and the numbers depend on your personal financial circumstances, local taxes and rules. If unsure about the potential impact on you, please seek professional financial advice.