Salary and Equity Trade-Off in a Startup

One of the challenges for cash-strapped startups is paying market rate salaries. In lieu of standard salaries, equity is often a strong component for alignment of interests, upside in the event of an exit, and to compensate for lower salaries. Only, in areas outside of Silicon Valley, equity is often not viewed as being worth much due to so few exits and such little lore of millionaires created from stock options.

What might the trade off between salary and equity look like? Here are some questions to ask:

• What’s the market rate salary for this position? What’s the difference between the offer and expected salary?
• What’s the value of the company now and what could it be worth in four years? Example: the company is worth $1M now and expected to be worth $21M in four years (best case), so .1% of the equity might be valued at $200,000 based on .1% of the difference between $21M and $1M.
• What’s the risk profile for accepting the difference between current salary and potential upside? Example: assume salary is $5,000 per year less than market, so $20,000 in less total compensation over four years, but the upside of marking $200,000 from the stock for a 10x risk profile between one dollar in less current comp to 10 dollars of potential comp.
• What personal benefit is good/bad working in a chaos-rich startup environment vs a more established company?

Many startups have an equity component in their compensation and potential employees would do well to understand the salary and equity trade trade-off.

What else? What are your thoughts on the salary and equity trade-off in a startup?