I love these hot and tumultuous times for emerging companies. Contrary to what some politicians and the media would love to have you believe, with every iteration the whole ecosystem is getting stronger, better, and more agile. But as more companies start up (or expand), there is a desperate rush to snap up the talented individuals needed to grow these businesses. This haste often leads to poor decisions and/or shortcut-taking, which results in compensation packages/offers that are one-sided, unfair, and detrimental to both sides.
In this article I want to take care of my readers who are looking to move to another startup or join their first emerging company. Here are the three top startup compensation shortcuts you should not settle for and accept.
Probably most common one you will see goes like this: “Let’s start you at salary X and after you prove your value, we will decide on the proper compensation and equity”.
I have made the mistake of accepting offer structured like this and know many others who have also made the same error before. Don’t ever EVER EVER accept any offer without well-defined compensation and expectations.
- More often than not, by accepting such an offer, you lose professional respect. However, this may not have been the company’s intention. Especially in early stage startups, many founders are just too inexperienced or naive to know the consequences of an offer like this, and think they are putting a great proposal on the table. But, the consequences are always the same: you will NEVER be able to gain this respect back, even if you pull miracles for the company.
- If you accept such an offer, you are assuming an investor level risk without the commensurate rewards. Risk needs to be equalized or you will not be respected.
- Once you have accepted such an offer, there is no reason or motivation for anyone to get you up to compensation level you should have gotten. You will end up paid less and with smaller equity than someone who negotiated properly.
If you are an exec on the other side of the table, you are causing monetary damage to your company with an offer like that. Why? Sooner or later person, who accepted this poorly thought-out offer, will realize the imbalance of risk/reward and will leave just when you need them the most. It is often most valuable early employees get screwed with offers like that and leave bitter. I have recruited away plenty of people (easily too) who felt they got shortchanged like that.
An even worse offer is one that sounds like this: “why don’t you work for us for X months for free, help us out, show us what you can do, and then we will agree on your role, responsibilities, compensation, and equity.”
- An offer like this means the company does not know what they want, what they need, and what expectations they have for you – all three of these things set you up for failure, no matter how good you are at what you do.
- If you are faced with this proposition, but still really want to work for the company, set expectations, and do a much better job at selling yourself, but do not work for free.
For those on the other side of the table, call your friendly employment law attorney. He or she will very quickly make you understand what you are about to expose your company to – this kind of rookie stuff bites you HARD!
This last type offer is becoming more and more rare, since less talent is falling for it: “we can’t offer you a salary at this time, but why don’t you work just for equity”.
- The problem in this case is that the employee does not founder rights and rewards. I am glad to see this practice is slowly disappearing, but there are still plenty of rookie founders who think this is OK.
- If a startup is run by “adults”, is setup properly, and the founders have their act together, it is ok to do some part time contract work for a company for equity only. But, there better be proper non-qualifying deferred compensation provisions in your agreement. If this kind of agreement pops up for a full time engagement, you are then a co-founder and should enter this relationship as such with proper agreements, equity, vesting, etc.
- Unless you can negotiate clear equity for each milestone achieved (think measurable achievements rather than massive projects), you should really walk away. You will end up frustrated and angry. In the end, it is human nature to value people for what we pay them.
And for folks running these companies, remember that in most states it is illegal to “pay” an employee all in “deferred compensation”. You have to pay at least minimum wage with applicable overtime.
I hope this article is helpful for both sides, and I hope fewer talented individuals will accept poorly designed offers like these. We need healthy companies with a healthy talent pool.