A good friend of mine was recently negotiating a salary at a start-up. As is common for early stage companies, they didn’t have much cash and were asking him to accept a salary that was lower than he expected. He wasn’t sure if this was fair and asked if I had any benchmarks. I didn’t, but I shared a line of thinking that I created while I was at UCLA which he found very helpful. I share it again here…
To be fair, the genesis for this idea came from an entrepreneur who spoke in one of my classes. If I could remember who it was, I would happy give him or her full credit. The basic idea was that the upside of a startup should compensate for what you give up. I call it the 10X rule.
If you think of working for a startup on purely financial terms, you are willing to be paid less cash in order to gain the potential upside. Of course there are other reasons for working for a startup. It is more fun, more challenging, and more interesting than a typical daily grind. That said, I was a outdoor BBQ chef on Vail Mountain which was a very fun job that I quit to become a business-dork. All business-dork jobs are less fun that BBQ chef, but fun isn’t everything, cash is a factor.
So back to startups. We do it in part for the upside but how much upside is enough to compensate you from the cash you are giving up? An example in round numbers…
Your value at Big-Co $100K
Your salary at a startup $80K
You give up $20K a year
You expect to work for the startup for 4 years, so you give up a total of $80K
So you’re going to give up $80K, you’re an idiot, but wait, there is upside!
You own 1% of the company and you think it will sell for $100M giving you a payout of $1M
You are a genius, you are giving up $80K to get $1M in the future, but wait, what are chances that you get the $1M?
Only 1 in 10 startups exit successfully so the “expected value” of your upside is $1M x 10% = $100K
Good news, you are still a genius, the expected value of your upside is greater than the compensation you are giving up.
To define the rule-of-thumb, the value of your upside should be greater than or equal to 10x the cash you are giving up.