The designers guide to startup equity
‘Every single employee of an early stage startup should be more than willing to take a pay cut in return for equity. And if this isn’t your mindset, I would probably look for jobs outside of the startup world.”
This is a relatively controversial statement in the world of design, however I believe it is fully justified. But before we get into that, we need to make sure we’re on the same page about what an early stage startup is. My definition of an early stage startup is one that is pre-series A and has likely closed a seed round of investment for <$1,000,000 and they don’t have much money in the bank. If a startup is has over $2,000,000+ in the bank, pretty much every employee should be getting paid at least 80% of the industry standard salary and have a small % of equity to keep them at the company. Please bare that in mind throughout.
So what do designers think about equity vs salary. Well, Dann Petty (an awesome designer in SF) recently ran a poll about this and it shows how it’s pretty split across the board.
Looking through the comments and opinions on this post you can see how there a few trends in the thinking of designers.
1. Equity has no value. 1% of nothing, is nothing.
2. I want to have my cake and eat it.
3. It’s all down to risk and reward.
4. I just want a paycheque.
As a Design Founder (we need more of these!) and CEO of a startup I want to shed a bit of light from both sides of the table. There are a few things I’ve learnt in my somewhat limited and naive experience of design and startups.
Equity has tangible value
If a startup is at a seed stage, investors are, on average, willing to pay around $1M for 20% of the company. Therefore each % isn’t just worth $50k to an investors at that moment, they are hoping they will get at least a 50x return on their investment. Therefore the perceived value is actually closer to $2.5M per percentage point. All employees should believe that this is what a percentage is worth and if you don’t believe it is worth that, I would be hesitant to take a job for a company you don’t believe in. Yes you are banking on nothing becoming worth something, but that’s the whole point of startups. You are making something from nothing.
The pay cut should be temporary
If the company is between Seed and their Series A, the paycut won’t last for more than a year. Plus, if you’re one of the first employees, it’s likely you’ll end up in a more senior position, than if you took a job at a standard company. This usually results in you earning a higher salary within the first 3–5 years, plus you’ll end up becoming a core part of a company. You can even do a rough bit of maths.
*these are all rough estimates, but you get the idea
Obviously you’ll need to be sure the founders believe in promoting people in the team, so do check this before ever starting work at a startup
Only work for a startup if you believe in its success
One of my biggest gripes with people who clearly want to get paid industry rate as they assume the company won’t ever make it beyond 18 months. In short, if you don’t believe in the company, don’t work for them. As 95% of startups fail, you’re probably right, but everyone on the team has to believe that you’re in that 5%. So if you see there is potential and that the company will succeed, take a pay cut and help the founders build something awesome.
Founders will hire those who want more equity
Whenever we hire someone, we always present them with 2 options. High salary, low equity (e.g. $75k and 0.1%) and low salary high equity (e.g. $40k and 2.5%). If the employee eagerly takes the low salary, it’s a clear indicator they believe in what we’re doing and are therefore exactly the sort of person you want on the team. If they want a high salary it simply shows they may not believe that the company will exist for longer than a year. Early hires set the tone of the company, so it’s crucial they all believe the company will be there in the long run. Startups are flipping hard and the team needs to be there to support each other when things inevitably get tough. Taking equity shows you’ll be around for the long haul and founders should give the first employees a decent amount as they are so important.
Designers deserve more equity than people realise
Most startups devalue design and often only associate them with the look and feel of the product and brand. Founders need to realise designers can help make incredible business decisions as they often have a great grasp over the big picture and market as a whole. Because of this they need to be in the meetings when these decisions make place and they should have the equity compensation that shows how much impact they’ll have of the business in the long term.
In year 1, take as much salary as you need. But no more.
Early employees need to realise that every startup is hanging on a very thin lifeline. And sadly, that lifeline is money. At seed stage, most startups are making huge losses every single month, so money (investment) needs to be used extremely carefully. Every single dollar you don’t take in salary, can be used to help the company grow, making it more likely for the company to exist in the following year, with a bigger team for you to work with, a new role for you to grow into and a larger salary to take home.
Investors only invest in companies where the team are also invested
When an angel investor or a VC puts money into a company, they want to see that their money is going into the companies growth, not just into the pockets of the team. Investors want founders and employees to be invested with their time and with money, as this shows they’re all in it for the long term. If an investor see’s the whole team on $100k+ salaries, there’s going to be a lot of questions asked, and it will make securing investment incredibly hard.
Startups are all a big balance of risk vs reward. Know when to take a chance on a company and only take that chance if you truly believe in the team. Startups are likely to fail, but with a great designer behind them, they are so much more likely to become the next big thing.
Jon sums it up nicely. Startups never have much money to give.
If you want to read a bit more about what we’re doing at my company — Availo, a platform for freelance designers. Take a look here.