Nitin Gupta is the Head of Benchmarking at Pave, an On Deck company started by an ODF3 founder and number one on On Deck’s list of the top 100 companies of 2022. In this guide, Nitin walks us through how to best understand the complex world of startup compensation.
When I was a VC at Bessemer, the first question that all of our companies would ask was how much they should pay people. I was shocked that companies had barely a clue how much to pay their employees. Then when I joined Newfront, I was a manager myself and realized: wow, this is a real problem, and it trickles down throughout the organization. Not only do executives not know how to set compensation, but managers aren't empowered to actually make compensation decisions themselves.
This ambiguity comes at the expense of employees and job seekers. If managers don't have the right tools or knowledge on how to communicate compensation to them, they are put at a disadvantage. My work at Pave is my commitment to help fix this problem.
Paul Graham likes to say that the most interesting startup ideas are solving problems hiding in plain sight. I believe that the fact that we all operate in this formal labor economy but don't understand anything about compensation is one of those problems.
In this guide, I’ll arm you with knowledge of the current talent market and provide insights on how to effectively negotiate salary and equity.
How to negotiate your salary
Let’s start with a quick overview of how to negotiate your salary compensation. First and foremost, always ask for the salary band and level of the job. Most companies set a salary band for different levels in their organization, a range of compensation for a given role determined by the department (software engineering, marketing, HR, etc.), the seniority level (for engineers, P1 - P6), and the location of the job.
Some states, like New York and Colorado, are actually making it mandatory to share compensation bands with candidates. It’s important to ask about the salary band and level because they are the most crucial areas for negotiation between you and a hiring manager. Let’s say you’re a software engineer and you got an offer of 120k for a job at the P2 level. You will be much more effective in having a conversation and negotiating if you frame your argument in these terms. For example: “Actually, I don’t think I’m a P2 engineer. Here are my credentials, here’s my performance. Let’s talk about whether I’m a P2 or not.” Once you negotiate your level, you can move on to discussing compensation in the same way.
Performance often plays a role in where you fall within an employer’s band. If the band for a P2 engineering job is $100k - $130k, then your offer will likely depend on their perception of your seniority level within that band. This can also be a point of negotiation and conversation. Ask the hiring manager what they would need to see in order to place someone at the top of the band, and figure out if you fit those requirements. This is a much more effective conversion than trading arbitrary numbers back and forth.
Next, ask about their compensation philosophy. How well do they pay compared to the rest of the market? What percentile do they target? If you ask a company about their compensation philosophy and they don’t tell you, it probably means they don’t have one, and they don’t have their stuff together when it comes to compensation benchmarking. They might be a very early stage startup. If that’s the case, it’s now in your court to educate yourself and them about what the market is paying.
Let’s say they respond with: “We target the 75th percentile and we offer a 20% pay difference between cities like San Francisco and New York versus Atlanta, Georgia where you live.” You can do your own research and use this information for negotiating leverage. For example: “Actually, Atlanta isn’t typically paid at a 20% lower level than San Francisco anymore due to remote work.”
The last thing you should ask is where their hiring data and assumptions are coming from, what market data they are looking at, and which companies they benchmark against. If they can’t answer your questions, they’re probably not following a process, and they should sign up for Pave or another compensation data tool so they can start being deliberate and equitable in their compensation strategy.
What questions should you ask when negotiating salary?
What is the job’s salary band and level?
- The salary band is the range of base compensation for a given role and is usually determined by department, level, and geography.
- Some states make it required to share this information with candidates.
What is their compensation philosophy?
- How do they pay compared to the rest of the market?
- Does geography factor into their salary decisions?
- Does performance play a role?
Where do they get their compensation data?
- Where do they get their benchmarking data? Do they use a compensation data tool?
- Which companies do they benchmark against?
How to negotiate your equity
Equity is a confusing topic that we’ve written about on our blog a number of times. Here are some key terms to be familiar with:
- Gross equity value - the most recent preferred price of the company times the number of options that have been given.
- Net equity value - the gross equity value minus any debt used to finance business operations.
Most startup equity packages offer options, not shares. This has a lot of benefits for you because options do not provide you any immediate income that is subject to taxation, and the net equity value is equal to the gross equity value: the preferred price times the number of options you have, minus the strike price (the cost to exercise the options).
During your interview, ask for the total number of shares that have been issued so you can contextualize the number of shares or options you have been granted. You should also ask what the price per share is for the preferred shares in the company to understand what the market most recently paid for shares in the business.
Understand the company’s valuation history, when they raised their last round, and how much cash they have left over today. Especially in today’s market conditions, you want to know how fresh their valuation is, if the business has the runway to grow into that valuation, and what the market would price the shares at today if they had to raise again.
How should you approach an equity negotiation?
Understand the key terms around equity
- Gross equity value
- Net equity value
- Strike price
Get a clear picture of your equity package
- How many shares or options have you been issued?
- What is your strike price?
- How many total shares or options have been issued?
- What is the preferred strike price?
Determine the value of your equity
- Number of shares * (latest valuation of the share - strike price)
The current state of compensation transparency
But what if your potential employer refuses to provide answers to the questions above, or simply doesn’t have all the information?
I think that you can tell a lot about a company based on how knowledgeable and transparent they are about compensation. Here is a baseline of what every employer should share with you:
- Salary - base compensation and any variable compensation.
- Equity - number of shares or options you’ve been granted as well as your strike price and vesting schedule.
Almost every employer shares this information, and if they don’t, it’s a huge red flag.
If a company is more transparent, and wants you to make the most informed decision possible, they’ll also share the preferred stock price, the preferred price history, and the current post-money valuation of the company, as well as some more thorough benefits information.
Now, what should we as a collective candidate base push for in terms of compensation transparency?
- Salary bands - here at Pave, we share all of the bands within your department and level so employees can understand what they need to accomplish to progress in their career, and how their compensation will look over time.
- Capitalization details - how much money has a company raised? How much of that is in preferred financing? How much is left in the bank? When you get equity, you become a shareholder, and as a shareholder, you have the right to understand the key financial details of a business. It’s very different to accept a job from a company that has $100 million in the bank versus a company that has $10 million. There are trade-offs you should understand going into your equity negotiation.
Look for companies that are willing to share information about their fundraising fundamentals and equity packages as well as their compensation bands, philosophies, and data sources.
Where there’s smoke there's fire. If a company you’re interviewing with doesn’t share this information it means they don’t have their act together and it puts the prerogative on you to push for what’s needed to make an informed decision. Transparent companies will share this information readily because they’ve done the work and are proud of what they can offer their team.
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