Should you take a pay cut to work at a startup?

Elad Gil: Bootstrapping: Raise Debt From Your Employees

Elad has written several interesting posts about getting a startup running. I worked with Elad and Othman, cofounders of Mixer Labs, doing a little bit of design consulting when they were just starting out. They also ended up offering me a job — so I had some direct experience with the types of practices Elad mentions.

In my case, E&O talked me down to about half of my normal consulting fee. This was fine because I was still working fulltime and it was a small project — maybe 40 hours over a 6-week period. I elected not to take the fulltime job for a couple of reasons, one of which was the cashflow issue. I wasn’t sure if I wanted to basically invest my own money by taking a 50% - 70% salary cut, and didn’t think I’d get enough equity to be worth it.

And that’s how I looked at it: The startup was raising money from me, but I probably wasn’t going to get a comprable equity cut. Suppose a startup takes $2 million in VC funding. The VCs get a 40% stake and probably preferential treatment on an exit event (i.e. if you get bought out for $2.1m, the VCs take the first $2m and the rest gets divided amongst the remaining equity holders). The founders get in the realm of 10% - 20% each. Senior engineers / VPs / early directors may get somewhere between 50 and 150 basis points (0.5 - 1.5%).

Suppose I worked there at a salary cut of $50k per year for the 2 years until the startup has an exit event. I’ve invested $100,000 in the startup via lost earnings. (Remember, if the startup tanks, I lose my money too.) As a design-type person, let’s assume I was one of the first 10 employees and got 50 bp of equity. That means I’ve paid $2,000 per bp. On the other hand, the VCs who contributed $2m for 40% (4,000 bp) are paying $500 per bp. If the founders take, say, a $100k / year salary cut, they’re each investing $200k for, say, 10% — or $200 / bp.

If I’m going to get bupkes for bp as a non-founding employee, then I want a full salary. If I’m investing, I should get a comprable equity cut to other investors.