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Take a pay cut to work at a startup

Ellen Beldner, referring to an earlier article which suggests you should raise debt from your employees by paying them less than market rate, comments that the amount of shares per dollar invested (in the form of a pay cut) is lousy compared to other investors.

That's a good point, but it's ignoring a number of other factors:

Risk Analysis

If you're going to analyse risk in this way do it properly. Guess some probabilities of huge exit (say 1%, if you really believe in this startup), moderate exit (say 20%), and failure (say 79%), and calculate the risk-adjusted returns on your investment (i.e. multiply each probability by the return associated with it).

Then decide based on that and your risk appetite, and the risk-adjusted return, not based on "other investors are getting a better deal". Of course they're going to get a better deal: they're putting in millions of dollars (in the VC's case) or, alternatively, they bet everything into the startup when it was just an idea and the risk profile was much worse (in the founders' case).

Lifestyle factors

Also factor in the kind of lifestyle that the startup will offer. This heavily depends on the startup's culture, but don't ignore that factor. For some people, the alternative will be working for a large corporation, which will result in a very different lifestyle.

Career development

Working at a startup will not only allow you to learn things that you wouldn't learn while freelancing or working at a large corporation. It also allows you to meet people that you wouldn't otherwise bump into. It is not uncommon for the founders or investors of startups which previously employed you to invest in your startup, when you decide to start one.

Passion

Compared to a market rate job at a large corporation, the right startup can give you the opportunity to work on a cool product that you can really be passionate about. I would add that, unless you feel that the product is that awesome, you probably shouldn't work on it.

Your current situation

Your current financial situation is also a factor in the decision. Of course, if you have a mortgage and three kids, you probably won't be interested in below-market-rate jobs at a startup. You simply can't afford to make that "investment".

But not everyone is in that situation. If you're 24, single, still in the student mindset (i.e. willing to live in a shoebox on a shoestring budget), and want to get the best out of your job, rather than have it grind your soul out of you in exchange for a bit more money, working at a startup can be a great experience.

In conclusion

Numerous factors are relevant when choosing whether to work at a startup. The pay cut is just one of them.

On the other side, if you're running an early startup and you can't get people to work for you at below market rate, you should ask yourself whether there's something fundamentally wrong with your idea that makes it so unappealing.


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