Joining a Startup? Negotiate Cash Over Equity


Do not go gentle into that startup night.

Whether you're joining a startup with seed funding or being recruited by a company that's already raised serious chunks of venture capital ($50 million, for example), you must acquire industry knowledge and conduct your own due diligence to avoid becoming a casualty of founder overconfidence. Elizabeth Holmes of Theranos comes to mind: look at the credentials of the people who went “all in” on a micro-diagnosis device cooked up in the mind of a 19-year old college drop-out.

I've been consulting with women in tech startups - biotech, big data, genomics, pharma and the like - for many years, and every consulting assignment deepens my understanding of the pitfalls mid-career people face when they trade a stable but boring job for the “lottery ticket” of startup equity.

The Internet is chock full of good and not so good advice. My purpose here is not to spill all the beans, but to guide your own independent research and point out some common perils to expect when you’re offered startup equity.

So, let's begin.

Trading Base Salary for Equity: Dilution

This is the 5th circle of hell for non-founders who are considering giving up cash compensation today for a chance at the brass ring that eluded Eduardo Saverin, co-founder of Facebook. As The Social Network revealed, Saverin's interest in the company was rudely yanked out from under his feet by the principle of dilution.

Can you negotiate a non-dilution clause? Yes you can. It’s one of those instances where you’re unlikely to find negotiation advice on the internet. If you’re this deep into your compensation negotiation, you shouldn’t be working without a net. You’ll need an advisor. We do that.

Trading Base Salary for Equity: Vesting

These days, few startups are offering their new employees options to buy stock in the company. Instead, they're offering Restricted Stock Units (RSU's). The typical offer comes with a one-year "cliff" after which the new employee is granted a fourth of the total equity awarded, "payable" during the second through fifth years of employment.

The problem with RSU grants is their treatment by the IRS as income during the year they "vest," i.e., the year you actually own them but still can't trade them. Some startups have graciously "solved" this taxation problem by delaying the actual grant of RSU's until the company goes public (and its shares become tradeable on a stock exchange) or the year in which the company is sold to third parties (and its shareholders are paid for their interests).

Although startups tend to treat RSU's as part of employee compensation, the taxation "solution" makes them incapable of valuation. Why? Because the startup may never go public and its founders may never sell it. That doesn't mean it will fail. It just means that your RSUs may not "vest" even as the company's value soars.

If you've become a key employee, delayed sale is a good reason to renegotiate your compensation, especially if you've been given assurances that the company plans to "go public" in a year or two. If it does, your equity will become the goldmine you’ve staked your future on. If not, well, that’s the bargain you made, even if you joined with the confidence that the venture you married has already raised B or C funding. These companies too are more likely to fail than not. As Pando explains, this "Series B Trap" results in failure when a company has scaled up too quickly with the money raised in the B round.

Your due diligence here includes taking a close look at the degree of scaling taking place at the time you’re poised to join. Back in 2011, the Startup Genome Project warned that 70% of startups scaled prematurely and 74 percent of high-growth Internet startups failed as a result.  I haven’t found a more recent statistic, but this one is startling enough to put on your due diligence list.

Trading Base for Equity: Monetizing

If you're joining a startup you will be offered equity, with rosy predictions of future profitability, and you will be asked to give up some percentage of your market value based on high expectations for Facebook or Google levels of success. Rare is the company that hasn't told my consulting clients that they are the "Google of . . .  [big data, pharmaceuticals, bio-tech, genomics or, increasingly rarely, social media]."

I never counsel risk aversion, just risk caution. This might, indeed, be your only chance to get in on the ground floor of something big. Just understand that equity does not equal cash.

The bottom line is simply to treat equity for what it is: a lottery ticket in a constantly changing business environment, littered with the corpses of glittering startup opportunities. Don’t let your startup negotiation partner monetize it - ask for your full market value in cash unless you’re the type who likes to put $50K on red in Vegas.

Are you considering joining a startup? Book a Hello Call with me to see whether you need to create a business and negotiation strategy to avoid the pitfalls and increase your own chances of success.