Josh Elman

19 Aug, 13 tweets, 3 min read

I wrote down some advice I often give people when evaluating startup offers and thought I would offer it here.

The whole point of choosing to work at a startup is trading in some known / fixed amount of cash salary today for the upside chance of a lot more. So it is important you understand the value of your stake and upside, as well as the opportunity cost

First - make sure you know what your comparable offer at a big company would be including cash, bonus, liquid stock. That is your cash basis for total annual comp to compare against. If you have that job already, great. Otherwise levels.FYI is a good resource

Second - make sure you understand all the parameters of your startup offer. Understand the cash piece - which will be less than the big company. And understand the equity. You need to know the share price, number of shares, and current valuation those are held at.

Understanding your share value is really important. Companies that hide the ball and don’t tell you the number of shares outstanding or your % this represents are not giving you enough information to make a sound decision. Don’t trust them. Run away. This is not good.

But… don’t be upset when the percentage of the company is a percent of a percent either. You rarely join early enough to get tenths of a percent let alone hundredths. And you aren’t going to get close to 1% or more unless a senior executive at a very early company. And even then

Ok - so now you know your share value and the company’s current valuation.

Now, calculate your equity’s value as if the company 2-3x in value as well as 10x. And for an early valuation (sub $100m), calculate at 50x and maybe 100x

Take those calculation and divide it by your vesting schedule (usually 4 years). Add these back to the cash salary. This will be your annual compensation depending on how the company grows and how much the multiple grows.

Calculate the difference in annual cash - being all inclusive from the big companies.

This is what you are giving up in hopes of the equity upside.

It is often a lot. This can be hard for many people depending on personal spending rate. That’s ok, startups aren’t for everyone

But now compare your startup salaries combining the equity at those various multiples.

At 2-3x, you should feel there is at least a match to what you could get from the bigs.

At 10x you should feel like you made a very good life choice.

At 50x or 100x you should feel rich.

Put this all into a spreadsheet and stare at it for a while. This is what I always did.

Decide how likely you think it is for the company to hit those multiples. Or go to zero. Remember you still get paid cash, so you only lose the difference.

And if after staring at the potential outcomes you feel like it is worth the risk, take it. Startups can be a ton of fun. They can also be roller coasters. And can set you back too.

Trust your gut. And this only works if the startup gives you enough information to do the math.

Oh and this was all about how to compare the financial offer. Of course there are a ton of other reasons to evaluate line if you are passionate about the opportunity, the challenges you will face, the people to work with, etc. those all matter a lot too of course!

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