Nov 13 2007 by Brad

Compensation In A Very Early Stage Company

Q: What should my compensation be?  I’m going to be the first full-time employee of a new startup.  As it is so early stage, it is hard to say what the title is, but the role is certainly similar to a CMO or VP BizDev type person.  The company just raised around $500k in an angel round that is convertible debt to be converted at the valuation of the first VC round but better terms.  I’m more interested in equity than a market salary, but I do have a mortgage, wife, 1 child and another on the way. 

A: (Brad): The good news is the company has a little money in the bank.  That gives you (and them) the ability to have a rational discussion about the trade between cash and equity.  If you recognize this is a trade (e.g. the less cash comp you take, the more equity you get), you can have an intelligent conversation. 

The mistake I see most often is that the early employee doesn’t recognize this trade.  The conversation goes something like "I’ll take a 20% discount to market salary but I was 5x the normal equity I’d get if I was getting a full salary."  This irrational.  While you can make the argument that cash is worth a premium to equity, it’s not worth this kind of a premium.

The normal dynamics tend to end up between the two end cases – full salary and no equity at one end and 50% salary and 2x normal equity at the other end.  My recommendation when people ask me this question is to say "figure out the least amount of cash comp you can afford – ask for that – and then ask for roughly 2x the equity package you would normally get.  Oh – and expect that the equity will have normal vesting terms on it – you shouldn’t get better vesting because you are taking a salary cut."