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The Nature and Stages of Compensation in Young Companies

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At startup, the only employees of a business may be just an entrepreneur with a dream and a circle of pitch-in-and-do-whatever-is-needed associates. The entrepreneur can't pay much to these people. Even if the business has some income, it's not enough for market-level salaries.

Cash pay is subsistence at best. The real pay is the highly uncertain chance of a huge windfall through stock options, plus far more responsible and interesting work and a higher title than an inexperienced person could command elsewhere.

At intermediate stage, the business is up, operating, and generating sales. Maybe there's even a slightly positive cash flow. Or venture capitalists may have injected funding and there's lots of positive publicity. The potential of the business is more apparent. Risk seems lower. Therefore, less equity is now needed as bait. And more experience is demanded. Indeed, the company now needs some sophistication in its key managers. Newcomers are still sacrificing current cash. But less so than the earliest employees. By now we clearly see the nature of a young or a mature company. There are three components:

  1. Cash,

  2. Career opportunity...a more interesting and challenging job with a higher title than one could obtain in a larger, more mature and stable company, and

  3. Equity opportunity...options or warrants that might create great wealth.
At IPO stage, experienced professional managers are needed to impress Wall Street analysts and the investing public. The company needs credentialed "been-there-and-done-that" people. Cash compensation for these people is still lower than they'd make in an established company, and options are still the main reward. Maybe a $500,000-a-year person will accept $200,000, plus options. But by now cash is at least credible.

My point in all of this is that there's no free lunch. If you want to go for the Mega Money, you've got to be willing to be grossly underpaid in cash at every stage of a company's development. In fact, you're really purchasing your stock participation...and paying for it in cash! In the earliest stages, you're also being paid to a high degree in career opportunity. Maybe you're just a Financial Analyst in a large company. Now you leap to CFO of a risky startup. If you can mature to the point that your title is merited by your performance, you'll have been paid handsomely for your time, even though not in dollars.

Yes, lots of people have made killings that make us envious. More folks will in the future. But there are trade-offs and enormous risks. Wherever you choose to position yourself on the risk/reward continuum, I wish you good fortune.

Now let's look at the difference between employment negotiations and every other kind.

When you negotiate to buy a house, or a boat, or a car, the object itself stays the same in your eyes, while you haggle over price. Your liking and respect for the seller can drop to zero. But what you're trying to buy remains just as enticing as it was the first moment you saw it.

Unfortunately, when you negotiate for your own employment...and even if someone else "fronts" for you (which I don't recommend)'re not just selling yourself. You're being yourself. You were a "class act" during your interviews. Don't figure it's now safe to turn into a ruthless...or a petty... sleaze, just because the employer has chosen you and begun discussing your terms of employment. As my Granny used to say:

"There's many a slip, twixt the cup and the lip."

If you demonstrate any undesirable characteristics at this point, the whole deal may be off. Anything that seems overreaching or underhanded will be held against you.

So stand by everything you promised, stated, or implied. If you described your current compensation as X, don't suddenly claim it's X plus 35%, just because four friends tell you that's what they're getting for almost exactly the same job you have. And if you initially implied that it would be easy for you to relocate, don't later raise all sorts of costly problems you want your potential employer to throw money at.

She just may decide that you've been less than forthright... or at the very minimum that you're a drag to deal with. And on either basis, you could still lose out to another candidate.

The trick in negotiations is to indicate what a good deal you have where you are.

In the end, you won't move unless you score a significant improvement.

And nobody's going to ask you to. At least not if they fully appreciate your current circumstances and compensation.

Responsibility, growth opportunity, and possibly a chance to build long-term net worth...not just a boost in current income...will be the main reasons for you to consider any move. But you do expect financial improvement, both immediate and long-term. And the only way your prospective employer can know the full extent of what you're getting now is if you tell him.

As an executive recruiter, I always make sure to find out every facet of current compensation, plus any expected changes within the next 12 months. And I communicate all of this information to my client in a detailed written summary before he meets the candidate. That way he realizes right from the start that Candidate X will have to get upwards of $490,000, whereas Candidate Y can probably be hired for $370,000 and possibly less.

Face it. Cost/value assessment works exactly the same in hiring executives as in buying merchandise. There will be no reluctance to pay what you obviously cost...a reasonable incentive over what you're making now...if you're evaluated and proven "the one we want" during realistic shopping for alternatives.

But if you allow yourself to be thought of as a $250,000 candidate, when it will really take more than $360,000 to move you, then don't be surprised to receive an "underwhelming" offer. And don't be surprised either, if subsequent disclosure and bargaining can never quite build the financial platform you should have stood on from day one.
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