Understanding and Evaluating Startup Job Offers - a Quick Guide

understanding-and-evaluating-offers

Choosing between different job offers can be a difficult process. How do you evaluate equity against salary or benefits? Does the ability to work remotely matter? Are there ‘traps’ that might seem good in a job offer on the surface, but aren’t nearly as important as they seem? Below, we’ll give you a quick outline on how to navigate these questions, along with tools, resources, and articles you can use to help you figure out which startup job to choose.

What defines a “startup” job offer?

Before we dive in too deep, however, let’s make sure we’re on the same page about what a “startup” job offer even means. I say “startup” because depending on your definition, a “startup” could be a company like Google, Facebook, or Twitter, who have already gone through their IPO!

Because of this, let’s break down startups into subcategories:

  • “Founder” stage startups (~1-4 employees, pre-investment)
    • These are startups in the “idea” or “wireframe” phase, or perhaps have a rough early prototype model.
    • The offer is almost always entirely in equity
    • If you are coming in as a founder or co-founder, this is the stage your startup is in.
  • “Investment” stage startups (4-50 employees, post series-A)
    • These are startups that have gotten investment, or can at the very least support and pay for employees above and beyond the founder level for at least a year period.
    • At this point, no more “founders” are added, but these companies are bringing on “first” employees in different categories, and offer them either tiny amounts of equity or stock options.
    • Startups that exit Y-Combinator could fall into this category, for example.
  • “Established” startups (50+ employees, rapid growth and recognizability, pre-IPO)
    • These are startups that are either profitable, or have raised enough money to grow rapidly for a sustained period. If a startup moves into a new office space only to grow out of it within a year or two, they are probably in this category.
    • At this stage no equity is being given out but stock options remain a staple.
    • Snapchat, Reddit, and basically any other startup you recognize that has not gone public fits here.
  • “Entrenched” startups (XXX+ employees, post-IPO, name brand recognition)
    • Really shouldn’t be called a startup anymore, but since people do anyway we might as well make it a subcategory
    • At this stage bonuses and stock options are the main incentives given out to new employees, along with intangible benefits (free child care, massages, food, etc).
    • Google, Facebook, Twitter, Amazon, LinkedIn, just to name a few

In this article, we won’t be covering the first category -- “founder” stage startups. We don’t consider people looking for cofounders to be extending job offers if there isn’t any form of cash compensation attached to the offer, and startup offers at that stage consist almost entirely of equity. Instead, we’ll cover the last three types of startups: “investment stage” startups, “established” startups, and “entrenched” startups.

What does a startup job offer look like?

Let’s break down the basics of what a typical job offer from a startup will contain, so we can compare them to other startup job offers or even non-startup job offers.

In a nutshell, your startup job offer will boil down to the following pieces:

  • Salary
  • Options/Equity
  • Bonuses
  • Benefits

When you look through your job offer, be sure to look for these four things -- you can easily remember this with the acronym S.O.B.B, because that’s what you’ll be doing trying to understand all these things. Here’s the breakdown:

Salary

Examples:

  • $90,000/year, paid biweekly
  • $40/hour, non-exempt, paid weekly

Explanation:

Most people should be familiar with what a salary is, so we won’t spend much time outlining this. To be brief, salary is how much money you’ll be paid, in what currency, in what time interval, delivered in what type of installments.

For most startup job offers, this will be in dollars per year paid bi-weekly, but for internships this could be delivered in a lump sum at the end of a period, or in dollars per hour.

Exempt / Nonexempt refers (very generally) to whether you get paid overtime (overtime meaning any hours you work past the normal 40 hour/week schedule). You are either exempt from overtime (eg, you do not qualify for overtime), or you are nonexempt from overtime (you should be getting paid extra money if you work past 40 hours in a week).

Things to know / Watch out for:

  1. Salary is negotiable!
    It maybe sound simple, but just because a startup offers you a certain salary, doesn’t mean you can’t try to get more. One of the reasons many companies don’t post salaries is because they want to be flexible depending on the candidate. Negotiating a salary is beyond the scope of this guide, but in general, having several competing offers gives you leverage to ask for more money.

  2. Don’t just compare numbers.
    If you get a job offer from New York or San Francisco, you may find yourself suddenly seeing 6-figure salaries (all those zeros!) floating in front of your eyes. If these jobs require you to move to their cities, however, you might suddenly realize that after rent, taxis, and taxes, you make less than another job offer in a smaller city. Do your homework! Figure out what a comparable salary is in another city by using cost of living comparison tools (or use our tool) to make sure that you’ll be able to spend any of that extra money you’re offered.

Options / Equity

Examples:

  • Options: 5,000 options at a strike price of $1.00, vested over 4 years with a 1 year cliff
  • Equity: 5,000 shares, vested over 4 years, with a 1 year cliff

Explanation:

Different offers have very different language explaining options or equity compensation, so it’s important to look over everything carefully.

For options (also known as stock options), you aren’t offered stock, but the option to buy stock at a certain price at a later time. In the example above, if all 5,000 of your options have vested (explained below), you could buy 5,000 shares company stock at $1.00/share, for a total cost of $5,000. If the company IPO’s (also known as going public, allowing their stock to be traded on a stock exchange) and starts trading at $5.00/share, then you were able to buy $25,000 worth of stock (5,000 shares x $5.00/share) for 1/5th the price ($5,000).

With equity, you are offered stock directly, usually from a pool of stock designated for employees. You’ll often see this in and around the “founder” and “investment” stage startup area, where startups are trying to hire first employees or cofounders early on.

“Vesting” for both stock and options refers to how long it will take to earn what you’ve been offered from these. If you vest over a 4 year period, for example, that means that you won’t get everything you’ve been offered until you work 4 years at the startup in question. For most common startups, you’ll typically see a 4-5 year vesting schedule with a 1 year cliff. What this “cliff” means is that if you leave before you’ve completed that period, you won’t receive any stock or options, but the minute you hit that cliff, you’ll usually bump up to a proportional percentage based on the number of years to vest. Here’s a graph to explain:

In the above graph, we hit our 1 year “cliff” and immediately receive 1250 options / stock (5000 options originally offered / 4 years vesting period), and then we continue to get more stock or options until we “fully vest” after those 4 years.

Things to know / Watch out for:

  1. Stock and options can go down, too.
    In the example above, I talked about how if you purchase all your options after they vest for $5,000 (5,000 options * $1.00 strike price), and the company IPO’s and starts trading at $5.00/share, then you were able to buy $25,000 worth of stock for $5,000, netting you a profit.
    Then again, if stock ends up trading at $0.50/share, your options are worthless.  This happens more often than you might think, so be careful.  When thinking about when to exercise your options, it is important to know if you’ll be liable for any taxes, and if, when you leave the startup, your options will expire.  If you are receiving restricted stock when joining a startup or exercising options, ask a lawyer about filing an 83(b) election with the IRS so that you will not be liable for regular income taxes on your shares.  For more information, check out this article.

  2. All stock is not the same.
    When it comes to stock, there are categories, restrictions, terms, and much much more. Although again this is beyond the scope of this article, depending on these categories and restrictions, you may find that although you might think your stock makes you a rich person, it is worth a lot less. For more information on this, check out the article.

  3. You’ll be waiting a long time
    The way most employees profit from stock options and stock is when the company IPOs, which usually is a long time down the road. There are other ways to sell stock before that time (if the startup gets acquired, sometimes during investment rounds, and sometimes on secondary markets like SharesPost and SecondMarket), but in general, you better be in it for the long haul.

  4. You might not actually “keep” stock you vest
    Similar to #2, some startups add in terms where they can repurchase stock from employees under certain conditions, like if the employee quits or is fired. Read more about this here.

Bonuses

Examples:

  • Signing bonus of $10,000
  • 10% (of salary) performance bonus
  • 10% of company profit shared among employees (profit sharing)

Explanation:

Signing bonuses are one time sums of money paid to you upfront to join the company, to incentivize you to work for that company over others. Signing bonuses can sometimes include products (eg: We’ll buy you a laptop you can keep), or stock/options (5000 shares upfront).

Performance bonuses can be individual based (eg: your boss determines if you performed well), or company based (the company hit 200% user growth month over month), and can differ when they are given out (quarterly or at the end of the year), but are mostly based upon a percentage of your salary.

Profit sharing is fairly uncommon, but in general is given out quarterly or at the end of the year (similar to performance bonuses). The general idea is that a company calculates what profit is has made during that period, and then X% of that will be distributed among the employees.

Things to know / Watch out for:

  1. Performance bonuses can be moving targets.
    Many performance bonus structures can be vague, so be sure to understand under what conditions you’ll be getting the bonus, and under whose discretion that bonus will be allotted. If bonuses haven’t been given out in a year, or depend on a goal that the company has never met, or depends on your manager saying you did a good job (what does he define as good?), you may find yourself never getting those bonuses.

  2. Profit distribution depends on profit.
    Many startups don’t make a profit for many years. Even the ones at do usually heavily reinvest the extra money back into the company, which ends up meaning less “profit” to share with the employees.
    Terms can also differ on how that profit is distributed (by whom and under what conditions), and can depend on how long you’ve been at the company, or where you are on an organizational chart.
    In general,  if you see a profit sharing plan, ask the company what the last distribution to its employees was, and what the average amount was.

Benefits

Examples:

  • Health / Dental / Life Insurance
  • 401k Retirement Plan
  • Sick Leave / Vacation Days
  • Work Remotely

Explanation:

Benefits usually encompass anything else that is left in the job offer. The hardest part about this category, however, is evaluating its “worth” to you. Working remotely, for example, can be a great benefit that gives employees more freedom -- if people don’t need to move to another city, or don’t need to drive an hour to work each day, they can save money and time. Here are a few questions to keep in your head:

  • Health / Dental / Life Insurance:
    • How much does the insurance/dental/life insurance cover, and how much will you still end up paying a month afterwards?
  • 401k Retirement Plan
    • How much is the company contributing? Is there matching? Is there a limit?
  • Sick Leave / Vacation Days
    • How many sick leave and vacation days are you getting?
    • Are these paid or unpaid days?
    • What paid holidays are covered, if any?
  • Work Remotely
    • What percentage of the job can be worked remotely? (fully? Half the time?)
    • Can employees be located anywhere, or do they need to be “near” the headquarters, in case they need to come in?
    • How do employers “check in” with their remote employees? Is it a quick Skype meeting once a day, or constant surveillance?

Things to know / Watch out for:

  1. Beware “unlimited” vacation/sick time.
    There have been many articles written about how “unlimited” vacation ends up being rarely used, leading to more worn out employees. The standard amount of paid vacation days in the US is around 10 vacation days, and in Europe that number doubles to 20. Ask the startup how many days of 'unlimited' vacation the average employee is taking.

  2. Benefits don’t exist if nobody can use them.
    Beware of startups that pressure employees not to use the benefits they are offered. They may have an arcade room or ping pong table, but if you never see anyone using that arcade, it may be there just for show.
    Steve Blank wrote a great article years ago that shows what happens when startups start to take away company benefits entitled “The Elves Leave Middle Earth – Sodas Are No Longer Free”. Steve talks about a company that eliminated their free drink and snack policy and started charging money instead, and how it led to an exodus of their best developers.

How do I compare my startup job offers?

Alright, you’ve been given a crash course on what defines a startup job offer, what a startup job offer will contain, and even things to watch out for. But how do we now evaluate different offers to choose the best one?

To be honest, it’s hard to give a perfect way to quantitatively evaluate different job offers. That being said, we’ve created a new tool that can help calculate out what might make the difference in job offers. It takes into account many of things I talked about above, including salary, cost of living adjustments, stock options and equity, bonuses, vacation, and many more things. It’s not perfect, but it’s a step in the right direction.

References