I have dealt with hundreds of employment agreements, promotions, and other compensation arrangements. And I tend to help my friends too, so my dataset includes both sides of the table. Given how the compensation information is easily accessible, I am often disappointed that I am still coming across rather regrettable shenanigans practiced out there.
Here are the three top startup compensation shortcuts you should not settle for and accept:
The most common one you will see goes like this: “We will start you at salary X. After you prove your value, we will decide on the proper compensation and equity.”
I have made the mistake of accepting an offer structured like this before. Never again! You have to work out the parameters of the relationship, expectations, and remuneration before you start.
- Especially in the early-stage startups, many 1st time founders are too inexperienced or naive to know the consequences of an offer like this and think they are putting a great proposal on the table. The ramifications are always the same: resentment and eventual departure from the company.
- Once you have accepted such an offer, there is no reason or motivation for anyone to get you up to the compensation level you should have gotten. You will end up getting paid less and with smaller equity than someone who negotiated diligently.
If you believe you are at a higher level of skill and expertise with commensurate higher compensation, it is on to you to prove it. Please do it. “Believe me,” or other pleading does not work. Put in the work to educate.
On the other side of the table, you are causing monetary damage to your company with that kind of offer. Why? Eventually, this employee will realize the imbalance of risk/reward and 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 who felt they got shortchanged.
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. They will quickly make you understand what you are about to expose your company to – this kind of rookie stuff bites you HARD!
And if you decide to take investment, you will be asked to warrant compliance with the labor laws during the due diligence.
This last type of offer is becoming rarer and rarer since less talent is falling for it: “We can not offer you a salary at this time. Why don’t you work just for equity?”
- The problem is, this is not compatible with the employer-employee relationship. Labor departments will have issues, so will tax folks. You are subject to the labor laws regardless of how early-stage your company is.
- If a startup is set up properly, and the founders have their act together, it is ok to do some part-time contract work for a company for equity only with the proper documentation. But, there better be proper non-qualifying deferred compensation provisions in your agreement.
- Unless you can negotiate equity for each milestone achieved (think measurable achievements rather than massive projects), you should walk away. You will end up frustrated and angry.
I hope this article helps both sides, and I hope fewer talented individuals will accept poorly designed offers like these. We need healthy companies with a healthy talent pool.