Getting a job offer at a startup is both exhilarating and relieving, especially if you’ve been looking for a while. It’s in this moment though where a lot of people let their guards down and make some big career mistakes. Here are three pitfalls I’ve seen people fall into over and over:
1) Signing the offer without negotiating
When it comes to salary, some people are okay with taking a lower salary or not asking for more with the mentality that they’ll work hard and get raises and promotions later on. However, according to a study of 330,000 U.S. companies and 24 million private-sector U.S. workers conducted by ADP, it is likelier that you’ll get a bigger wage increase when you’re switching full-time jobs than when you’re looking for a raise.
Thus, you should be negotiating during the offer stage to get the most value.
2) Signing the offer without understanding the equity component
Many people take a startup role instead of a big corporation gig in hopes of striking rich with their stock options in the event of an acquisition or IPO. The problem though is that the rules surrounding the equity component are fairly complex, and most people don’t really have a solid understanding of it.
That lack of understanding gets a lot of people burned (Scott Belsky wrote a great article on this).
As a product-obsessed entrepreneur and investor, I rarely focus on financing mechanics in the start-up world. It tends…medium.com
Examples range from employees learning too late that exercising their options requires a big upfront payment to not knowing that their company has no intention to exit, which is why the next point is important.
3) Signing the offer without asking about the financial health and direction of the company
Getting the offer finally gives you a chance to ask your hiring manager the hard questions. No, not the “where do you see your companies in 2 years?” kind of questions.
But questions like, “how much money do you guys have in the bank?” or, “does leadership want the company to be sold or go public? If so, do you have a rough time horizon?”
You want to ask these kinds of questions to ensure that the company is not a sinking ship, and that it is indeed right for you.
A guide to help you navigate this process
I’ve committed these and many other mistakes over the past five years. As a result, I started doing a ton more research and found a lot of good advice that made me much confident in this process.
I did notice that it’s hard finding these resources unless you know what questions to ask. And you won’t really know what questions to ask unless someone tells you or you make the same mistakes I did. There’s also not a lot of transparency around compensation because people don’t like to talk about it.
That inspired me to put together this guide to help you navigate this process, ask the right questions and get more clarity and value out of your offers.
The guide* is broken down like this:
- Pre-offer Stage — what you need to know before you take that call with a recruiter
- Offer Stage — terms of the offer and clarification questions you should ask
- Negotiation Stage — how to get more value out of your offer
*This guide is focused on early to mid-stage startup offers, but the advice in Negotiation Stage are applicable to all job offers. It’s also a lengthy, but informative read, so take your time going through it.
What you need to know before you take that call with a recruiter
Before discussing numbers, we should make sure we’re a good fit for each other at this stage.
In your first interview, the hiring manager or recruiter will almost certainly ask you what your desired compensation range is. I’ve been told not to reveal my range early on in my career and say something to the effect of “Before discussing numbers, we should make sure we’re a good fit for each other at this stage.”
I followed this advice and ended up wasting a lot of time and resources. By not specifying what I’m asking for, I ended up continuing the interview process for companies that didn’t have the budget for a salary that I’d be happy with. So even when I got the offer, I had to turn them down. By that time I had already invested time in traveling and preparing that I could’ve used for other companies.
The interview process is fairly time consuming, so you don’t want to be dedicating your time, especially if you’re still at your current job, on companies that aren’t a match financially for you.
That’s why you should be upfront about your range. If the company can’t offer you what you’re looking for, the recruiter will usually tell you that, in which case you can decide whether you’re open to taking a lower salary before spending more time preparing.
Also, you’ll want to prepare for this question because you don’t want to hurt yourself in the negotiation process later by saying too low of a range.
So how do you know what your range is? A good place to start is to look at average salaries for your position in that city using one of these three sites:
- Glassdoor: https://www.glassdoor.com/Salaries/index.htm
- Paysa: https://www.paysa.com/salaries
- Angel: https://angel.co/salaries
Get a feel of what the market is currently paying for your role, and you can adjust it based on your level of experience. There’s also this huge list of self-reported salaries that you can take a look at, but I’d take that list with a grain of salt.
Terms of the offer and clarification questions you should ask about it
When you get the offer verbally, never accept on the spot, even if the offer is amazing. What you want to do instead is to thank them for the opportunity and ask for a written offer. Then you should tell them that you’d like to take a day to talk it over with your friends and family, as this is a big decision for you.
There will be some companies who’ll question your excitement or seriousness in the role if you don’t accept on the spot. You can push back and say that because this is such a career changing opportunity that you want to take some time to really think it through.
You want to ask for time to think for two reasons:
- So that you can review the offer carefully and ask clarifying questions after. The answers to those questions will become important for the negotiation process
- To give you a chance to think about your negotiation strategy
Once you get the written offer, make sure you review the terms carefully, especially the equity component. This article does a really good job explaining the equity component, so if you want a thorough understanding of it, I’d highly recommend you read it. Buffer also wrote a great article on this that you can check out.
What if the company doesn’t give you a written offer? There are a few companies that do that, and for those especially, you’ll want to ask the below questions to really understand what they’re offering you.
It’s now your turn to ask clarifying questions. Below you’ll see a list of the questions I always ask. Companies will generally not tell you information like when your stock options expire or how much money the company has in the bank unless you ask for it. It’s extremely important to find out the answers because you won’t fully understand the scope of your offer without them.
What percentage of the company do my [YOUR_SHARE_AMOUNT] options represent? I.e. how many fully diluted shares outstanding are there, including common, preferred, restricted, options outstanding, unissued shares, warrants, etc.
It makes a huge difference whether you have 10,000 shares out of 1,000,000 (1%) or out of 10,000,000 (0.1%). It’s also good to check whether investors got preferred shares (which means that they get paid out before anyone else does).
What type of stock options am I receiving?
Startups typically give out Icentivized Stock Options (ISOs), but in case they’re something else, like Restricted Stock Units (RSUs), you’ll find out ahead of time.
When did [COMPANY_NAME] have its most recent 409a valuation done? What was the valuation given to the stock?
Given the speculative nature of startups, the IRS forces your company to work with a third party company to determine the fair market value of the stock options that the company is given out. This is called the 409a valuation, and the strike price of your options is typically priced at the valuation, e.g. $0.50 per option.
Do these options come with an early exercise option?
If your company offers this, it’s a huge benefit. The way ISOs work, you pay no tax when you exercise your options. Instead, you pay capital gain taxes on the difference between the sale price and exercise price of your options. However, there’s major gotcha here.
Let’s say your company decides to give you 10,000 shares priced at $1 each. There are 1,000,000 shares, so you effectively own 1% of the company for $10,000.
Let’s say this company, which was worth $1,000,000 does really well and gets valued at $20,000,000 a few years later. If you exercise your options here and pay $10,000 for $200,000 of stock, $190,000 is viewed as income for the purpose of Alternative Minimum Tax. If your tax rate is 20%, you owe $38,000 of tax when you exercise.
In order to avoid this, some companies offer the early exercise option, where you can exercise your options before they vest. Let’s say you exercise your options when the company was still worth $1M. You pay no tax here because you hadn’t made any income, and you won’t pay any tax when the company gets valued at $20,000,000.
Again, this is a huge benefit, so be sure to see if your company offers this.
For a more in depth reading on this point, check out Alex Flint’s answer on this in Quora.
Do the options terminate if I leave [COMPANY_NAME]? If so after how many days?
The tricky thing about most options is that they expire 30 or 90 days after you quit. It doesn’t matter if you worked at your company for four years and all your options vested. If you leave and your company still hasn’t had a liquidity event, you could stand to lose all of your options unless you exercise them before they expire
As we’ve seen from the previous answer, exercising your options, especially this late, could come with enormous tax bills, so this can put you in a bad spot.
This clause is very detrimental for employees, so what companies started doing is extending that the exercise period to 10 years. So if you work at your company for two years and quit after, you’ll have 10 years to exercise your vested options.
This is a very, very good benefit because you can wait to see if the company gets a liquidity event before exercising your options, which significantly lowers your risk.
How much money does [COMPANY_NAME] still have in the bank, and what is your current monthly burn rate?
You want to ask this to make sure the company is in good financial health. If they refuse to answer this, you could ask them how many months of runway the company still has.
How to get more value out of your offer
Now that you have all the information you need about your offer, it’s time to negotiate. So how do you go about asking successfully? The most effective way I found is to use any additional information you have as leverage. This could be another offer, national salary average, or information you found out above.
For example, let’s say your options expire 30 days after you leave, instead of the standard 90 days. Here’s how you’d phrase your email:
Hi [HIRING_ MANAGER]
Thank you for sending over the written offer. I’m excited about the position, and I’m confident that I can add a lot of value to the company.
Before I can accept however, I would like to discuss compensation with you. While the offer of $90,000 per year is generous, my salary requirement is $105,000 per year. My salary requirement factors in the fact that the options expire after 30 days of termination instead of the standard 90 days and the lack of a 401k employer match program. Note that my equity doesn’t have to increase based on the new number.
This is a fantastic opportunity, and I am confident I can execute on the marketing strategy, so I hope we can come to a mutual agreement on an acceptable salary.
In this offer, they’re given you something less than standard, so you can ask them to compensate you more on salary to make up for it. Again, you could use any other pertinent information, like if they’re paying you lower than average, or if you have another offer at hand.
What do you do when they come back and say they can’t budge on salary? That will happen sometimes. Maybe you’re already getting the maximum number. In those situations, you could ask them to budge on other things, like offering you a signing bonus or extra work-from-home days.
My advice is that if they don’t budge after two asks, don’t push anymore. What they gave you is probably the best offer you’ll get. All that’s left to do now is to to decide whether this offer is good enough for you to accept.
Hopefully this guide provided more clarity on your offers and helped you get more value out of them. Are there any other pitfalls you’ve seen or interesting strategies you’ve used to better your offer?
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