On: Big Tech Company Salaries Are Hurting Startups

[alpha_squared]

> ...found that I would want about 7% equity, in order to be interested. They said no, of course.

You wanted 7% equity to make up for 20k? That seems a little excessive...

[mring33621 → alpha_squared]

I used a very simple model for my estimate:

5 years to exit * 20K yr opp cost = 100K total opp cost

I think my payback should be twice my total opp cost, so I want 200K at exit

1% chance of exit at 600M valuation after those 5 years

I would expect my initial equity to be diluted to 50% of original value.

Hence, I want 6.7% equity at the beginning of the 5 years.

Note that, IMHO, I am being very conservative in calculating my opportunity cost for the lost salary.

[nugget → mring33621]

Alternatively you could have accrued the salary deficit as convertible debt that would roll into the next funding round, at a discount -- which is a bit more anchored than estimating a 1% chance of exit at $600M valuation (if you were serious about wanting the job, which it sounds like you mostly weren't).

[mring33621 → nugget]

Thank you for the suggestion! I'm not new to the idea of non-salary, future compensation but it is very new to me personally.

[pbecotte → nugget]

Is this something anyone has done? Seems like you would need lawyers to draw that up, but it appeals to me on a philosophical level...

[mring33621 → mring33621]

All these figures are subject to debate and would be more realistically modeled by probability distributions, but I was looking for a back-of-the-napkin quick estimate as a starting point for negotiation.

I also neglected to make explicit my use of the expected value of the exit in my calculations.

I hope this helps to clarify my thinking.

[ScottBurson → mring33621]

Seems like the key number here is the 1% chance of exit. If you really think the odds are that bad -- and I'm not saying you're wrong! -- then there isn't an offer they can make you that you'll take. They'd have to convince you that the odds are at least 5%, and probably higher, before there's a basis for a deal.

Averaged over all startups, of course, 1% is a reasonable estimate (might even be high). So another way to put this is, a savvy top developer just isn't going to join an average startup, period. They'll have to be persuaded that the opportunity is an extraordinary one. The bulk of startups will have to make do with less-experienced developers. This is why pretty much every startup now needs a technical co-founder.

[alpha_squared → mring33621]

> 1% chance of exit at 600M valuation after those 5 years

Ah, I see, I wouldn't have taken that into account since I'm not sure it quite works out that way. It seems you've intertwined probability with opportunity cost, is that correct?

EDIT: Thanks for the breakdown, by the way! I really appreciate the insight.

[pbecotte → alpha_squared]

He did it correctly... Except he didn't account for the time value of money, which would have made the salary side even stronger.

[timdierks → pbecotte]

This is the right math if he's stuck there for 5 years, but his opportunity cost is lower if he can exit the role earlier if the company isn't trending towards the exit he wants.

[logfromblammo → alpha_squared]

How would you know what excessive might be without valuing the company?

Seems reasonable for a company with estimated current valuation of around $300k.

[alpha_squared → logfromblammo]

That's true, I don't have a complete picture. I, probably falsely, assumed that he was being brought in as an employee in a team of at least a few people.

[mikestew → alpha_squared]

Or one might consider that after running the numbers, the company didn't seem to be worth all that much to begin with.