Negotiation

Pitching my own job description and compensation package

Deborah Chang

June 8th, 2013

I am in the enviable position of writing a pitch for my desired job description (chief of staff), my compensation package (equity, salary, benefits), and my non-negotiables for inclusion into my final contract with a startup that I have a verbal offer from.

I'd really like to get input, advice, from people who have negotiated their job description, compensation package, and non-negotiables and/or are startup executives who have evaluated pitches of job descriptions, compensation packages, and non-negotiables.

My questions are: 

1) How do I figure out what's reasonable? What should I ask for?

2) How do I prepare for the negotiation process?

3) What makes a negotiation strong?

4) What are common pitfalls (particularly legal) to watch out for?

5) How should I think about where I want to start vs. where I want to be in six months (in both roles and responsibilities as well as in compensation)?

Thank you in advance for either pointing me to the right resources to figure this out or answering these questions based on your own experiences!

Jonathan Vanasco

June 8th, 2013

I think you have to approach the dollar/equity concern differently if you're an investor or a candidate for employment.  An investor typically has some additional amounts of control and influence on the company and has a preference on returns, an employee is entirely passive and secondary.  When it comes to an employee candidate investing and committing a period of time , I don't think you can just translate a dollar amount to equity - i think you have to think more strategically.

You either take a startup job for experience or money. Unless you're one of the first 5-10 people in the door and grabbing at least 3% equity, there's usually not any decent money to be had.

Here's a typical example: The startup did an angel round (300k) and Series A (1.5MM).  They need to expand and want to hire someone who would have a market rate salary at 200k.  Because of cashflow and burnrate, they're capping salaries at 80k, and making the reset up with equity.  They offer the person a package that has x% equity as a make-up , and there's a lot of fancy justification for how much that is worth and what a great deal it is.  

If you do a pretty simple financial model, you'd see that over a 4 year period ( because your equity vests ), you're comparing 850k in salary ( raises ) against what will likely be 500k from the startup ( they'll take a while to bump you back up to market ).  That leaves a deficiency of 350k that the equity must return, just in order for you to make market rate.  

With only 1.8MM in the door, before any exit the company will almost definitely do another round at 5-10MM ; and most likely do another 10-30MM round after that.  Let's assume a 25% dilution across 2 rounds, which leaves you with .56x.  The founders claim a 20BN market opp and a 2BN company, but an IPO is very unlikely and similar companies have recently sold for ~300MM to many of the top "big internet" acquirers.  Passing 300MM is highly unlikely, hitting 300MM is very unlikely, hitting 150MM is a more realistic "home run".  So you're looking at 150MM - 35MM ( preferred stock ) = 115MM pool.  Your magic breakeven number is 350k, which is roughly .3% of 115MM... which roughly translate to a .54% initial grant -- and that's just for your options to dilute to a market rate.   One would think that, for taking a risk on this startup, you'd be getting some sort of a reward.  On top of that, your options aren't liquid - virtually every agreement mandates that they're non-transferrable and non-sellable; you're stuck with them until an exit.   On top of that, you're bound to the company for at least the 'cliff' period.

Outside of founders, I think options are largely a shell game.  They're a great bonus and employee retention tool against market (or near market) rate salaries -- but far too many companies will propose a compensation package that mixes significantly scaled pay with an equity grant that is just silly.  

I've seen grants proposed based on a figure or a dollar amount - e.g. a certain hire should get 2%  vs.  granting 120k in stock in exchange for giving up 100k cash off market salary.  when it comes to the second scenario, i rarely see companies that pay scaled salaries give people market rate a year later.  so what happens on year 2, 3, 4 ?  if you're on a 1 year cliff, with the expectation that you'll be back on a full salary after 1 year, and 10 months in the CEO says "sorry, you'll need to stay on scale" -- how should that affect your vesting? 

I don't have answers to those questions -- 10 years ago I didn't think of them.  But as I get older and think about mortgages, kids, etc... and see many people put into awkward positions because of startup jobs, those points really stick out in my mind.

Rob G

June 8th, 2013

Deborah, i don't think we have enough information to give you specifics.  so much depends on what space the startup is in, funding stage and amount, (bootstrap/VC backed, seed, A/B/C... round, etc.).  to be blunt, as a CEO your questions raise red flags for me - just being honest. Best advice I can give is to put yourself in the shoes of the CEO/founders and then ask yourself what you would want to see from this candidate and this process.  As CEO/founder its all about execution - getting the right stuff done in a chaotic environment with little formal structure or direction.  As CEO not only do you not care about job titles/descriptions, but you will be turned off by a candidate who is focused on such things. This is a startup, things are fluid and the founding team needs to see that you are nimble and flexible and able to wear lots of different hats and thrive in an environment that lacks structure.  Not sure what a chief of staff would do in a startup so i'm guessing this is a later stage startup and i'm guessing this is someone charged with "getting all that stuff done that doesn't neatly fit under skill sets of the founders (dev, design, sales, biz dev, marketing, product)". If you have the offer i would be very cautious in the negotiation process about appearing to 'corporate' or worried about process/job description, structure, etc.   Nothing wrong with being firm in your negotiations - CEO/founders appreciate people with good negotiating skills (as long as they are put to good use for the benefit of the company). Regarding equity, search for an article titled "cutting the founders pie" or "slicing the founders pie" - there are no hard and fast rules about equity, but this is the best primer on the subject i've found.  what makes a negotiation strong is the scarcity of what you have relative to the needs of the other party.  

Deborah Chang

June 8th, 2013

John, that seems like a pretty intuitive way to look at the balance of salary and equity. Thank you. Ben, good luck to you as well! Phil, thank you for the resource!

Michael Brill Technology startup exec focused on AI-driven products

June 8th, 2013

Any thoughts on how to translate a dollar value (like $90K) to equity (typically restricted stock or options)? I generally find that people just divide the dollar by the most recent preferred financing and that's the # shares. But I'm not sure exactly what that price has to do with value of common stock options. Is the basic argument that the company's goal is to have a liquidity event where preferred converts to common, and the common exercise price of options will be so low as to be inconsequential... therefore latest preferred is a reasonable basis for determining # shares? Of course that's wildly different from how common pricing is actually done, but not unreasonable. Are there are other principled approaches for converting dollars to options?

Ben Land Corporate Communications & Entrepreneur

June 8th, 2013

Deborah - thanks for the honest question - and kudos to all the members who provided such valuable input.  I'm in a similar position - flattering and daunting simultaneously - so I appreciate the learning this discussion provides.

Stephen Peters Looking for the next challenge and opportunity

June 8th, 2013

This may not help you much, but it is an interesting read on an non-typical way to go about this: http://qz.com/77020/the-secret-to-a-higher-salary-is-to-ask-for-nothing-at-all/

Deborah Chang

June 8th, 2013

Thank you to everyone who has replied so far! Lydia and Ron, I've emailed you to continue our conversation offline. Stephen, thank you so much for the link. On first read, that style of negotiation very much appeals to me. I am also a giver and would like to be in a productive working relationship with other givers.

For others following this thread, another article that I've found useful as well is A Fully Comprehensive Way to Write Your Own Job Description (http://inboundandagile.com/a-fully-comprehensive-way-to-write-your-own-job-description/#sthash.H09E2K0g.dpbs).

Also, the link to Rob's recommendation, I believe, is here: http://www.andrew.cmu.edu/user/fd0n/35%20Founders'%20Pie%20Calculator.htm

Finally, for context in case any other people also felt a red flag being raised, the founder of this particular startup gave me explicit directions to write the job description, compensation package, and non-negotiables pitch as a starting point for negotiations. I also hear the feedback that it's important to not appear "corporate". 

Deborah Chang

June 8th, 2013

I would also add as advice to talk to current employees/partners of the startup as well as ex-employees to get a read of baseline rates for compensation, expectations for the job, and how feasible your non-negotiables are.

John Wallace President at Apps Incorporated

June 8th, 2013

From a compensation standpoint, here's how I look at it: Let's say that my current yearly comp is $240K. Now, let's say that the most I can negotiate for is $150K in total comp (salary + benefits). That means that I am making a $90K/year investment in the company. (More that that, probably, since who works only 40 hrs/week at a startup?) So I'm looking to get at least as much equity as someone who would be investing $90K/year of cash in the company. That's the minimum number. I may figure that the risk, or my unique value to the company, or my opportunity costs push that number higher. 

Pitfalls I think about:
• my legal obligations/liabilities if the company goes under. 
• my tax obligations (if any) as a shareholder of the corp.
• when I can sell my stock and under what terms.
• what happens if I am terminated?

Before signing I'd want to see the company's shareholder agreements, investor agreements, promises made to investors/customers, etc. I'm making an investment. The last thing I'd want to do is invest in a company that isn't going to make it.

Phil Mitchell Founder at Larkwire

June 8th, 2013

There was recently a pretty good post on this topic on Hacker News: http://blog.upstart.com/2013/05/how-to-negotiate-job-offer.html https://news.ycombinator.com/item?id=5787759 ------------------------------------------------- Phil Mitchell *Larkwire* 206-679-9758 phil@larkwire.com @larkwire http://blog.larkwire.com