Deciding On an Offer At a Startup

When I first launched Deane Financial, my fearless and forward-thinking fiancée had decided to upskill and pivot into tech. After successfully completing both UX/UI Design and Software Engineer boot camps at some of the most well-respected and disruptive institutions, she’s now on the market. If you’re a Millennial in tech, it’s likely you’re also excited about the fast-moving startup culture, growth opportunities, and the chance to work on something high impact. If you’re deciding on an offer at a startup, one of the most critical factors you’ll need to consider is compensation.

Believe it or not, compensation is commonly structured differently at startups as opposed to more mature and established companies. In fact, even the life stage of a startup can significantly impact compensation, risk, potential upside, and work-life balance. The significant difference between startups and traditional businesses is that startups often operate in conditions of uncertainty. In essence of a startup, you might be managing unfinished products, working with undefined business models, or unproven strategies. 

Negotiating Your Benefits

At this point, it’s no secret that tech is a lucrative industry. After all, it’s partly the reason my fiancée chose to pivot into the space. As we’ve recently been vetting employment opportunities, we’ve noticed one thing for sure: There are special considerations to make when negotiating your offer at a startup, and it’s best to acknowledge the whole package, not just your salary. Compensation goes far beyond your regular paycheck.

When weighing job offers at startups, look at factors like bonuses, equity, health care and retirement plans, transportation costs, and schedule flexibility (e.g., working from home, vacation time, pets at work, etc.). Generally, the earlier stage the company is in, the lower the salary and benefits will be, but the higher the equity will be. As the company matures, the scales begin to tip in the opposite direction. However, there is no one size fits all. The value of each variable dramatically depends on the stage of a company’s growth, the role, and your previous experience. 

Word of advice: Know your worth.

If you’re joining an early-stage startup, stock options are frequently part of the compensation and gives you a potential share in the growth of the company’s value. Essentially, stock options give you the right to purchase a specified number of shares of the company’s stock at a fixed price during a particular timeframe. Although the accumulation of wealth through equity can make you financially well, it’s in your best interest to develop a holistic approach to stock compensation. For many Millennials in tech, this can represent a tremendous wealth-building opportunity. 

As the company raises more funding and progresses through the life stages of a startup, you should be earning a fair-market value salary. It’s a plausible idea to sign an agreement with your employer to guarantee a pay increase once the company has more capital. Trust me; there’s merit in understanding the fair market value of the position and putting a price tag on your background and experience. Leverage resources like Angel List’s salary and equity tool to learn what employers in your city are paying for similar roles. 

Think Like An Investor

Not all startups are created equally. The likelihood of a startup succeeding should be another vital factor worth thoughtful consideration. Early to mid-stage startups are usually investing in growth and development, so it should not be surprising if they’re not profitable companies yet. However, if there’s one thing we’ve learned from startups that recently IPO’d – it’s still essential that the unit economics make sense. 

Because the valuation of the company is determined by a handful of private investors sharing the same interests, it would be imprudent of you to accept that valuation at face value. Instead, examine the growth rate. Evaluate the strength of the team and the market. How well does the founder and team understand the problem they’re aiming to solve? How promising is the market? Does the company approach sustainable growth thoughtfully? When deciding on an offer at a startup, these are all critical components. 

If you’re offered a senior role, you might have the leverage to ask some of the more difficult questions. After all, it’s only fair that you get a shot at interviewing the company also.

Here are a few key questions to ask:

  1. What is your path to profitability?
  2. How much fundraising is required to get there?
  3. Will employee shares get diluted? If so, by how much?
  4. What is your burn rate?
  5. What is your expected runway?

An intriguing and noteworthy question to ask: suppose there was a significant downturn in the financial markets tomorrow, and raising another round of funding was not a viable option. What would you do? These questions may be offputting for some startups, but the best founders and hiring managers expect transparency and confidentiality on both ends. Remember, not all startups are created equally. If they are willing to answer these questions, they’re probably a great company to work for in terms of transparency and culture.

Purpose Over Profit

Working in the startup world can be one of the most fulfilling, exhilarating, and frequently challenging journeys of your life. When deciding on an offer at a startup, it’s more about aligning your vision and interests with those of the company and less about the benefits offered. At a startup, your work matters. You should genuinely be passionate about the mission, your day to day work, and the impact you are creating in the world. My mother used to tell me if you love what you do, you’ll never have to work a day in your life. For startup employees, if you love what you do, you’ll still have to work hard, but when you’re driven by a purpose, you reap the rewards in multiples.

A Holistic Approach To Stock Compensation

In the startup world, it’s no anomaly for companies to offer stock compensation as a means of attracting, motivating, and retaining employees. For those Millennials in tech fortunate enough to be provided equity, the rewards can be a significant wealth-building opportunity. Receiving stock options or other common types of equity compensation can feel like a windfall, but real happiness and success begins with discussions centered around how equity compensation can play a role in your financial life, alongside your values and goals. This sort of financial life planning is what I like to call a holistic approach to managing stock compensation.

Know Your Why

Money and wealth themselves are certainly not the end goal; they’re simply tools that provide the means to your goals. While accumulating wealth can improve your quality of life, there is more to stock compensation than becoming financially well. When you know your why, your efforts point toward something of higher value. What truly matters is what you do with that wealth and how you fit it into funding your personal life goals. When your purpose drives the process, it’s much easier to stay focused on the journey.

Using Equity Compensation to Fund Your Goals

When you receive a stock grant or acquire employer company stock, you gain an ownership interest in the company. Whether you participate in an ESPP or have grants of stock options or RSUs, when your company’s stock price increases your wealth increases, and perhaps substantially. 

If you’re looking for a holistic approach to managing your stock compensation, therein lies financial planning. Real financial planning should start with identifying goals. What do you want to do with the proceeds from the eventual sale of the stock? Understand what you want and need out of life – and the role equity compensation can play in building your wealth toward those life goals. For many Millennials in tech, that could look like starting a business, creating a nest egg for your heirs, providing meaningful experiences for yourself and your family, and the list goes on.

Managing your stock compensation meshes with the many moving pieces of your financial life. These areas may include cash-flow needs, retirement security, income taxes, investment strategy, estate planning, and job tenure, along with company and legal requirements (i.e., lockup periods). 

Understand What You Own

There are different forms of equity compensation, so it’s crucial to know what you own. Stock options give you the option to buy company shares at the exercise price, while RSU’s involve a direct transfer of shares to grant recipients. 

The intricacies of equity compensation taxation can easily catch the smartest, most organized person by surprise, so it’s essential to determine how you will handle them over time. Some factors that can affect your tax bill include:

  • Whether you have ISOs, NSOs, or RSUs
  • How long you’ve held the stock
  • Your income bracket
  • The price when you bought the stock and how much they’re worth when you sell them (if they were options)
  • State of residency 

Remain aware of your choices, the term of your options, vesting rules, and the tax and lost-gains consequences of your exercise decisions. Once you’ve figured out how your equity compensation works and how it will be taxed, you can then decide what it’s worth.

Diversification Matters

It’s natural to be excited about the value of your company — after all, you work there for a reason! Considering human nature, it’s not uncommon for employees to be overconfident in their estimates of their company’s performance. “But what if I work for a tech giant or unicorn?” I hate to break it to you, but even the top dogs can fall victim to a market decline or some other unforeseen event when you need the money. 

Having an ownership interest in any company means that you’re taking on the potential risks and rewards of being a shareholder. By owning company stock, you’re subject to both general market risk and company-specific risk (i.e., significant drop in share prices due to weak quarterly earnings report). It’s essential to be aware of the risk of overexposure when managing company equity. 

An advantageous approach to reducing the risk of concentrated positions is to sell the stock and diversify it into other investments. That doesn’t mean you have to sell all the stock and it certainly doesn’t have to happen right away. You might want to diversify over the course of a few years, and you’ll want to do it in the most tax-efficient way. Along with a trusted financial planner, you’ll also want to add a knowledgable tax professional to your arsenal. Trust me, this is a decision you won’t regret.