Should you take a pay cut to work at a startup?

http://www.ellenbeldner.info/2010/12/elad_gil_bootstrapping_raise_d.html

by atularora • 16 years ago

74 48 16 years ago

kevt• 16 years ago

Seems like you are evaluating this completely based on compensation. Here are some possible reasons why you would work at a startup and take a paycut. a) I love the team, I love what they are doing, I love the work that they want me to do... I can't believe they are paying me to do this! b) I can learn so much from this team and experience, and in a couple of years, I'll be ready to do *SOMETHING (ie. start my own company, etc)... I can't believe they are paying me to do this! c) Totally believe in the team and their vision, this is going to be the next facebook, I want to be part of it, my equity can be worth millions, but regardless...I can't believe they are paying me to be part of this! However if your primary objective is to maximize compensation, then you shouldn't take a pay cut to work at a startup.

ardit33• 16 years ago

That advice only works with people with little experience.

For us folks on our late 20s, that have 7+ years of experience, compensation matters. If you already been into few good startups, or build from scratch successful products in a larger company, you have very little to learn into joining yet another startup.

Also, if you are good you probably have a lot of choices out there. It is not a startup vs. big corp binary choice. A lot of mid-size companies also offer flexible work conditions with good pay.

My advice: 1. Learn what your value as an engineer is in the market. 2. If the startup is underpaying you, tell them what the difference is, and make sure you negotiate a good equity for it. 3. Place it in writing that your salary will go to full market value once the company gets the next round of funding.

At the end is your decision on what you are itching for. Just remember, most stock options go nowhere.

fleitz• 16 years ago

Good call, if you want to take a pay cut to work at a startup, make sure you're a founder.

You're going to get equally shit pay but will have a decent chunk of equity.

joshuaxls• 16 years ago

Exactly. I find the reason most startups have trouble hiring is that they're expecting to nab these people in their late 20s with loads of experience for the price of someone fresh out of college, wet behind the ears and bright-eyed and bushy-tailed.

azanar• 16 years ago

That advice only works with people with little experience.

True, but...

That anyone with some watermark of experience has little to learn from a startup is quite the assertion. Even if the few good startups you have joined and the few good products you've built from scratch have taught you a lot of things, I can't imagine making such a bold assertion even then that another startup has little for you to learn. Maybe they are attacking a different market; maybe they are using technology that is based on ideas you've only skimmed over up until this point. Maybe some other learning opportunity?

I wouldn't be so presumptuous as to dismiss the possibility of future learning based on something as arbitrary as years of experience. The idea that all years of experience are not equal is, I hope, a horse beaten to death several times over. It strikes me that basing amount of learning on years is a reasonable negative corollary to that.

Also, if you are good you probably have a lot of choices out there. It is not a startup vs. big corp binary choice. A lot of mid-size companies also offer flexible work conditions with good pay.

Probably, but flexible work conditions and good pay isn't the sum of what people look for in potential employers. I mean, it might be if we throw the concept of learning new things, amongst other incentives, out the window, but I'm really quite uncomfortable asserting that the average case of hacker has little more to learn, and should be optimizing more for comfort and predictability. My impression has been that the more people learn, the more they realize they have to learn, and the broader the range of areas they find to explore. Maybe I'm missing something?

1. Definitely, but also keep in mind that value is not compensated for strictly by salary paid. There are other valuable forms of compensation you can get, such as: learning new things you hadn't yet considered as interesting, maybe because you thought there was nothing more to learn from yet another company; a sense of greater autonomy, maybe because you don't believe that someone n-1 hops away from the market compared to your n hops is in a much better position to tell you what is and is not important; and a feeling that you are making the world of a measurably better place by helping to build new technology, maybe because you just have that sort of personality that can't do comfortable.

2. Agreed.

3. This is iffy, because you might be a position where you are reasonably certain that your options and/or shares will not be going nowhere, and in fact may be quite lucrative given the current valuation of the company. Granted, this valuation might be utter crap, but it seems like it would be really difficult to convince people that you deserve the same compensation of a specific sort as everyone else with this in mind. Stock and stock options might be an extremely speculative form of compensation, which only pays off on uncommon occasions, but that doesn't make the expected value of them close enough to zero that you can just dismiss them out-of-hand unconditionally.

At the end is your decision on what you are itching for. Just remember, most stock options go nowhere.

Agreed about the first point. But to temper the second point, it's not just about the stock options. And it certainly isn't about declaring that there's a threshold that gets hit at some age boundary, or some experience boundary, or even some number of startups you've been at, done things, and have a t-shirt to wear around town.

It really strikes me as more of a matter of what things you hold in greater value, and where you are prepared to draw lines in the sand about what you do and do not expect, or hope for, from choices you make. The danger here is falling into presumptive thinking, where you assume that whatever it is you hope to get out of making one choice vs. another isn't going to come to pass, and that you'd best target those choices that depend upon the least amount of serendipity possible.

Sure, you will limit the risk to you and those who depend on you the most in a relative sense (risk in an absolute sense is entirely another matter), but there are costs involved that aren't worth just discarding as irrelevant and/or relatively valueless.

FWIW, I just turned 30, and have someone who depends upon me for day-to-day needs. It does enter into my thinking as I make my decisions in life, but it does not so overwhelm the other factors that they stop mattering entirely. I think it is a mistake to operate from a line of reasoning where they do.

So, I'd probably aim for advice that lies right in the middle of the parent and grandparent commenter: don't discount your value in the marketplace, and don't be so naive as to assume that whatever you are dreaming will work out exactly as you expect. But, don't be so cynical as to assume that there are only a few valid forms of value transfer from organization to individual, and that the rest are crap and purposefully invented just to pull the wool over your eyes while you toil away for someone else's benefit. Somewhere between lies a cautious, and somewhat pragmatic, optimism. I can't say I know too many people where this frame of mind has gone wrong.

arethuza• 16 years ago

Maybe I'm an old grump but any time I'm offered a deal that seems to good to be true (the "I can't believe they are paying me to do this" mantra) I know there is a catch.

However, sometimes a deal is worth doing anyway, for your own reasons (e.g. getting experience in a technology or in a market). But at least do it with your eyes open understanding exactly what position you are in.

It reminds me of a quote in The Big Short:

When a Wall Street firm helped him to get into a trade that seemed perfect in every way, he asked the salesman, "I appreciate this, but I just want to know one thing: How are you going to fuck me?" Heh-heh-heh, c'mon, we'd never do that, the trader started to say, but Danny, though perfectly polite, was insistent. We both know that unadulterated good things like this trade don't just happen between little hedge funds and big Wall Street firms. I'll do it, but only after you explain to me how you are going to fuck me. And the salesman explained how he was going to fuck him. And Danny did the trade.

Treat employment like any other deal - try and understand both sides.

ndl• 16 years ago

This is an attitude that some recruiting startups like us all to believe, but even as a naive and inexperienced 22 year old, I think it's dangerous. I've had a startup implode, and it's nasty in ways one never expects - joining a startup is one of the easiest ways to ruin a relationship. You may love the work you expect to do, but a startup will throw you curveballs until you are sick of them. If you are willing to take crummy compensation because you love the team, think about what happens when they have an opportunity to discard you like used tissue - if they don't think you're worth a decent equity stake, they probably won't hesitate to.

You have to ask yourself if you couldn't gain better experience by a) working for a big company b) going to grad school c) founding your own startup. There might be cases in which the underpaying startup job really is the best next-stage career advancer. Even if this is true, read any non-compete agreement very carefully. I've had people shove non-competes in my face before telling me what the company actually did (so I could not compete with the entire industry? No thanks).

I would also not go in assuming that the company will be the next Facebook. Find out how the founders and investors plan to exit, and decide if that's acceptable to you. Furthermore, make sure you can deal with failure.

I think going in with realistic expectations and a clear head is just as important to the startup one wishes to join. I suppose there are some startups (many in NYC) whose goal is to suck in naive techies and dump them when they burn out, but most probably want to build a real team. If you sign something based on unwritten expectations, you are setting up for resentment and conflict when those expectations go unmet.

I probably sound overly pessimistic now, but I don't mean to be. Joining a startup can be a great opportunity in innumerable ways. I still intend to launch, even after some of the worst months of my life. Many of my friends who shared this sentiment no longer do. I think some had naive expectations about the lifestyle, how quickly we'd all be rolling in money, and what being an "entrepreneur" would look like to the rest of the world.

iworkforthem• 16 years ago

Er.. correct me if I'm wrong.

Take Auctomatic for example, they are acquired for $5 million in cash, for the 3% Y Combinator's stake, it translate to a return of $150K in cash.

Assuming your startup survived the first 3 years, for a Software Engineer who is willingly to work for minimum wage, shouldn't the amount of equity for it to even make sense should be more than the normal 1% to 2% right?

JoachimSchipper• 16 years ago

Most people probably earn more than minimum wage, even at a startup. Still, as you and the article point out, doing the math is good.

lusis• 16 years ago

Honestly it depends on your place in life. If you REALLY believe in the company and can afford to do so, then it's probably worth it.

I don't have that luxury (2 kids) right now so when I went to the current startup I'm with it was a sideways step. However I really believe in the company and was willing to take the risk of it not working out to make the move.

In fact I'm technically making less due to increased commute time and benefits changes but again, I really believe in the company.

awt• 16 years ago

I always like to think of working at a start up as akin to attending a relatively cheap graduate program where you may or may not get your degree after you complete all the coursework.

pegobry• 16 years ago

You should do what you're passionate about. The rest is housekeeping.

revorad• 16 years ago

Passion's our favourite buzzword too! We are just haggling over the price.

Apreche2• 16 years ago

What house are you keeping? Is your house made of passion? I don't know about you, but my house is made of money. If I have no money, I have no house.

dools• 16 years ago

First warning sign: someone self describes as a entrepreneur.

Second warning sign: asking you to work for free but your not an equal partner.

Danger! Will Robinson!

bigbang• 16 years ago

These days, when most of the founders are willing to cash out at an early exit, it doesn't make much sense economically to work in a startup(unless you are part of founding team with good equity). Ofcourse, work at a startup will be definitely more interesting on average (because there is not much legacy code to maintain and processes in place to slow things down), but its not hard to find interesting work in a big co. And the best part is you can work regular hours with relatively better benefits and job security and spend your personal time working on your own ideas. This way it maximizes both the economical and work related satisfaction IMO :)

robryan• 16 years ago

I think instead of a lower base salary and equity of a startup trying to go big early cashouts really call for higher salaries than big companies to be appealing.

krschultz• 16 years ago

Or at least equal. If I like the job and it calls for 60 hours a week instead of 50, but it pays the same, I'll gladly do it. The 50 hours of the week that I would have worked either way will be a lot more enjoyable. But asking me to take 1/3 of what I would get paid elsewhere just isn't happening.

Any offer that is work for free but take equity is not one I would consider taking as an employee (obviously, cofounder is a different story).

praptak• 16 years ago

You might just expect the startup to hit it so big that you don't really care how cheaply do VCs get their share. BP for $2000 might still be a great deal, even if VCs get theirs for $500 a piece.

Daniel_Newby2• 16 years ago

+1 for using basis points, a sensible unit for skimming a small profit off a giant deal. (A basis point is 1% of 1%, or 0.01%.)

savoy11• 16 years ago

I believe at this point most of the people on news.ycombinator are well aware of the "work at startup" bait. If you are that good to help a startup to grow from 0 to millions, you typically get $150K at Google (for example). For the 4-5 years it typically gets for the very few successful startups to cash out, you will be earning $750K for sure + benefits + sanity + normal life.

If you are that good and you are not one of the founders, you have to be very careful in your decision to join a startup. For every success story (it gets multiplied x 1,000,000 by the press), there are thousands of dramas and flops noone hears about.

messel• 16 years ago

Agreed, there's a serious risk vs reward problem of founders vs first employees. I see founding as an exciting option, equity, control, low/no pay before revenue or funding.

First employees face a different risk, starting with a competitive but subpar salary with very small equity and little stability (get fired and your vested equity goes away), and they work long hours like founders.

If you found, you have to find a way to make it worth the risk to early employees. Many founders go the route of hiring first employees out of school where their options are slimmer.

steveklabnik2• 16 years ago

> sanity + normal life.

What sounds like a downside to you sounds like an upside to me. Normal life is pretty crappy, though $150k sounds tempting.

kscaldef• 16 years ago

> Normal life is pretty crappy

You're doing it wrong?

My "normal life" is pretty awesome. Happy hour and meals with friends and girlfriend several times a week. Exercise most days. Most weekends include at least one of: hiking, rock climbing, skiing, snowshoeing, mountain climbing; often in wilderness areas with no cell phone coverage. Movies, live music, theater. Time to read books.

lkrubner• 16 years ago

steveklabnik,

I was about to say the same thing, but you beat me to it. I think the type of people who are most drawn to startups are the ones who go insane working the so called "normal life". I prefer to work at startups - maybe that means I'm crazy. But I prefer my brand of crazy over other people's version of normal.

flacon• 16 years ago

I agree. I recently worked as an Engineer at a startup for 2 years and helped take them from nothing to large scale. But after n many rounds of fund-raising and no additional stock option bonuses whats my incentive to stay? Founders, don't think that you can maintain a developers interest and enthusiasm in your idea over a period of years w/o some additional cash or options on the table.

mgkimsal4• 16 years ago

A somewhat interesting take on the situation, but is (obviously) looking only from one angle. Yes, in Ellen's situation, she's 'investing' lost earnings in to that company. But that 'investment' doesn't mean the same thing to the company, and probably shouldn't be rewarded with the same equity value given to someone putting in hard cash.

Still, it's good for people to think through these issues with real numbers before making commitments. I am approached every so often to come in to situations like the one described, but have yet to find one where I believed in the idea/company/team enough to jump in.

JoeAltmaier3• 16 years ago

On the contrary, lost earning are cash-flow too. They deserve the same (or more) equity than 'hard cash'. The arrogance of folks with money in their pockets is astounding. We don't need to add to that by buying into the fantasy.

ojbyrne2• 16 years ago

Sort of agree, except for the time value of money. Someone who puts cash in is putting it in up front. Whereas someone who forgoes earnings is foregoing a smaller amount periodically over time.

Of course the time value of money is near zero right now anyway.

mgkimsal4• 16 years ago

It might feel that way to you (or me) but you can do quite a lot with cash - such as bring in different devs with different skills. I could say I'm worth $120k and my contribution should be worth that, but I only have so many skills. Taking $120k and bringing in 2-3 people with various skills for different stages of a project has a different strategic value - in most cases it's a greater value than the contributions of one person. Obviously not always, but probably in most cases.

rwhitman5• 16 years ago

I'm sorry but this approach infuriates me. I am constantly approached by people asking me for discounts for equity, low salaries etc because of the idea that I'd get paid out at an exit event. And every time I take the deal, I end up paying their bills when the company fails. The founders walk away having not only left the investors empty handed, but now I'm in worse debt than when I started.

Founders, please stop having the people who work for you assume the financial risk of your venture. It is a completely f'd up practice, because 9 times out of 10 they end up paying your bills when the company goes bunk. An investor is well aware of the risks involved, but often times employees and contractors are subject to falling for hype and don't have enough information to make an educated assessment.

I think its great to reward people at a successful exit, but its another thing to take money out of their pockets because you were able to use your hype powers to lure them into working for you at a discount. Just know that for all your will power and positive thinking the magical successful exit is a very rare event, even for people with previous success. This means that when you ask a non-investor to essentially commit personal wealth to your vision there is a high probability that person will pay for it in the end.

/rant

Apreche2• 16 years ago

I'm 100% with you. This is the #1 reason I have not yet worked at a startup. Unlike some people who are already loaded, I have to pay rent. If you pay me in lottery tickets, and I lose, I'm homeless.

Whenever a startup sends me a job offer, which is quite often, I tell them I accept cash only. I'm still waiting for one to say OK. Maybe you can convince some naive college kids to work for peanuts, but good luck with that.

kareemm2• 16 years ago

Why don't you just say no to non-cash offers if you don't like them?

rwhitman5• 16 years ago

hey kareem... heh well i do now ;)

tibbon• 16 years ago

One thing you touch on here that's rather important is disclosure of information honestly to potential employees.

Whereas investors (hopefully) have done their diligence on the company and are privy to the full financial situation of the company, employees quite often aren't. Employees generally don't get a copy of the term sheet, or know much about their options beyond the "40,000 shares valued at .03 each with an outstanding number of shares being 10mm".

When you ask investors to take risk, that's one thing. They have the most to gain (due to more favorable terms) and aren't actually having to put in the sweat equity to make it happen, and they also get the best information. Employees however often have no idea what the burn rate of the company even is or what the current equity structure of the company looks like.

rwhitman5• 16 years ago

Yes. Exactly.

When a potential client or employer offers you equity, you can't sit there and ask them for their financials. And for the most part, employees and contractors aren't very well educated in the risks involved with investing in a startup either.

mgkimsal4• 16 years ago

The only time I've been left owing bills was when it my was gig. I'm not sure I'd be willing to come in to a situation with someone else where I'm signing my name to something where I'm in a position to be personally responsible. Why is the other person (the original founder) not being required to pay on the debt?

Maybe you're meaning something else by 'paying their bills' - do you have some example(s) you can share?

rwhitman5• 16 years ago

Sorry, I think I phrased that wrong. I mean "paying their bills" in the sense that I discounted my work to help fund their company

TooSmugToFail• 16 years ago

Well, by asking you to do that, your employer is actually asking you to invest in his business, so you should treat such offers with same scrutiny.

Now, if you were an investor, you wouldn't normally bitch about somebody pitching an investment proposal to you. You would inspect the business plan, get to know the team and make an informed decision.

Should you take a pay cut to work at a startup?

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