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Start-up Executive Survival Tip – Live Within Your Salary

Nate Lentz
February 23, 2016

I hate to say this but if you join a start up, you need to be able to live within your salary.  Not salary plus planned bonus.  Not salary plus 50% more coming out of savings, justified by the value of future stock options.  Live within your salary.

Too many executives leave corporate America and $300k jobs to join startups.  The rationale is like this: “I want to do something entrepreneurial and get out of the corporate rat race.  I love the team, the product, and the market.  It is something I always wanted to do and the time is now.” (That is all awesome)  “I can live with a salary of $150k for a year and with my bonuses targeted at 30%, that takes me to $195k.  The company is growing and we should raise a Series C next year, so twelve months out I should be up to at least $200k and with the bonus that is $260k and by then my stock options will be close to 50% vested.  So what if I need to pull $50k out of savings in year one to cover after-tax gap in cash flow, it will be worth it.”

Great logic – except for a couple things.  Startups don’t give 30% raises even after a Series C – they use this money to hire more people.  Bonuses get paid when a company is on plan, but startup CEOs are aggressive, plans are hard to hit, and bonuses at 80% of plan (in the companies where I am on the compensation committee) often equal zero – especially for the leadership team.  So now, twenty four months in, you are making $160k and didn’t quite hit the bonus threshold; you are having the time of your life; you are learning a ton; you are working with great people but have never worked harder; and you just hit your IRA for the second time, with penalties, to cover the second year of $75k after-tax shortfall.  You love your job but your wife or husband doesn’t.

What do you do?   Most often you try to stick it out for another six months but the pressure gets too much and you start looking back toward the security and paycheck of the kind of job you left two years ago.  It is just too hard to dial back a lifestyle and it is impossible to operate in negative cash flow for too long.  Maybe your experience in the startup positions you for a new gig and even more money.  I hope so.

CEOs need to understand this challenge when they hire experienced people for their executive team or for key management positions.  Explain that bonuses are a stretch.  Explain that wealth creation is in options not raises or bonuses.  Explain that cash is king for the business and the focus of all employees should be on sharing in value created.  Explain that this is likely a five year or longer journey and not a get rich quick scheme unless you really get lucky.  Try to understand the cost structure of the person being hired.  Ask the question and be honest.   “Can you live on this salary?  Because if you can’t, don’t take this job.”  It is the CEOs responsibility to fully explain what should be expected in compensation.  Don’t paint a picture you can’t deliver on because having this great hire join with the wrong expectations is not only bad for her but also bad for the company.

At the end of the day though, it is up to the executive or manager to answer responsibly.  “Can I live on this salary for the next several years assuming little to no change in salary and little to no bonus?”  If yes then congratulations.  This looks like a great job and you are off on a great adventure and the possibility of real value creation down the road.  If no, then do yourself a favor and stay where you are and enjoy the benefits of a great health plan and a 401k match.  You will be doing everyone a favor – including yourself, your family, and the company you are thinking of joining.