The following is an excerpt of a Wealthfront post that promotes a new tool for calculating average startup salaries. We’ve extracted just the tips, but you can read the full post at Wealthfront.It may sound strange for the CEO of an investment management firm to say this, but managing your career well is much more important than managing your investments well.
Good investment management – using low-cost ETFs and low-fee advice – can mean higher returns in your investment portfolio. Over time, that might add up a lot of money, maybe hundreds of thousands of dollars on larger portfolios. But the economic rewards that follow from good career decisions in the technology industry are potentially much larger.
When I was a venture capitalist, one of the first things I discussed with my CEOs was setting a budget for salaries and equity, using what we knew about typical pay at companies in the Valley.
For each position and at each level, there’s a range of compensation and, of course, a mean.
The CEO decided where his or her particular firm would fall compared with other firms. For instance, would the company pay in the 60th percentile for salaries, and in the 40th percentile for equity? (That would be typical for an already successful company, which is likely to pay higher-than-average salaries and offer lower-than-average equity). Never would a company offer both above-market salary and equity.
That leads to my first suggestion for managing your career well: Pay the most attention to the quality of the company when you are deciding where to apply or which job offer to accept.
Find The Right Company (Or Pie)
Choosing the right tech startup to work for is the single most important factor for maximizing the return on your career. Choice of company trumps position, salary and even the size of your equity package. A small equity stake in a big success is exponentially more valuable than a big equity stake in a failure or a minor success.
I illustrate the importance of growing the size of the pie to one’s share of pie to my entrepreneurship students at the Stanford Graduate School of Business by reminding them of the formula for a circle’s circumference versus its area. The formula for circumference (a proxy for share of pie) is linear (2 πr) vs. the formula for area, which is quadratic (πr²).
The single most important factor in a company’s big success (growing the size of the pie) is the size of the market the company ultimately addresses. Other signs of a future big exit that pays off for employees: a scalable business model and an unfair advantage (such as intellectual property, a unique business model or a proprietary relationship) that allows a company to earn high margins.
Those things might not be obvious from the get-go because so many successful technology companies pivot. Sometimes, the best clue to a company’s future success is the team’s ambition. The team will work on a big problem because that’s what’s important to them. I can’t think of a better example than my colleagues at Wealthfront, many of whom joined us because they wanted to work on an important problem: democratizing access to sophisticated financial advice.
Get What’s Fair, But Don’t Negotiate Too Much
You’re talking to a great company, and they’re offering you a job you love. Now it’s time to figure out how you’ll be compensated.
If the company asks you to name your salary first, ask them what they believe is fair. You can use our Tool to determine where the offer falls in comparison with the market. The mean cash compensation across all tech startups in all the markets was $112,000.
If at some point during the negotiation you’re asked to name an amount or an equity stake, you can use our Tool to decide on reasonable numbers. Don’t ask for an amount that is far above the average; the company most likely won’t break its budgets to hire you, and you will have damaged the relationship right from the beginning.
If you’re going to ask for a reasonable increase in the offer, ask for more equity. Getting another .1% can lead to a hell of a lot more money than another $10,000 of salary. The mean equity compensation across all tech startups across all maturities in all the markets was .072%.
Based on my experience, most companies will offer you a fair wage and a fair equity package. Those that don’t are those you don’t want to work for.
The Bottom Line
Managing your investments well is important. Managing your career well is even more important, because the stakes are so much higher.
When technology companies win, they win big. There’s no way to predict exactly how much you’ll make if you work for one of those winners when it goes public, but I can give you a sense of the value. Consider: the typical successful public technology company generates revenue of $500k per employee, and is valued (that’s its market capitalisation) at 5 to 10 times revenue. To find the value per employee, we multiply the revenue per employee by the typical market capitalisation/revenue ratio. We can then multiply that number by .15 – the per cent of shares that employees excluding executives typically own.
It’s a rough calculation, but it gives us $375,000-$750,000 for the typical employee in a typical IPO. That’s more than three to six times the average pay at a tech startup – $112,000 in 2011, according to our data.
With any luck, and if you join a tech startup in the early years, the payoff can be much larger.
Here’s the startup salary and equity calculator tool Wealthfront released today. It’s a good benchmark for employees at startups of all sizes: