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- 3. Compensation at Big Tech, Startups, and VCs
Hey there,
Welcome to where I write about my journey from a stable Big Tech Software Engineering job to the wild and volatile world of Venture Capital.
So you’ve survived the gauntlet of VC interviews and you’ve received an offer to join. Congrats!
There are many factors to consider when evaluating different roles, but VC compensation is particularly hard to evaluate.
But wait… why are these offers so low compared to Big Tech, and what the heck is Carry? How do you even evaluate or compare these to typical compensation packages you may be used to?
How do you even compare job offers with such different compensation packages?
I treat compensation like an investment of my time and like to do a Discounted Cash Flow analysis (DCF) to determine its present value before taxes (Sorry in advance, there will be some math here 😭).
To calculate a DCF you assume some discount rate which indicates the risk associated with the cash flows (different for public companies, startups, and VCs), and use this to discount the value of future cash flows:
Where
PV = Present Value
CFn= Cash flow at period n
r = The discount rate.
For a simplified example, imagine your “Tinder for Bernadoodles” business is projected to generate $100 every year starting today and for 3 years after. The present value of those cashflows (with a 5% discount rate) would be:
Public Companies
Compensation at public companies is straightforward to evaluate because they provide liquid options.
Let’s say you just received a job offer at MegaFirm Technnologies:
For simplicity, let’s just consider base salary and equity.
Base Salary | $200,000 |
Initial Equity Grant | $500,000 |
(Caveat: I know Big Tech has amazing signing bonuses, yearly bonuses, 401k matching plans, free meals, free transportation, paid time off, learning stipends, health and wellness stipends, hot goat yoga, and more. If you’re doing this calculation for real, please take all those factors into account)
Some Assumptions
Discount rate of 5% (liquid stock options are pretty low risk, in fact they may grow in value)
3.0% annual increase to base salary for the same role.
Standard 1 year equity cliff → 4 year vest.
Annual equity refresh grant is estimated to 25% of new hire grant.
Year 1 | Year 2 | Year 3 | Year 4 | |
Base Salary | $200,000.00 | $206,000.00 | $212,180.00 | $218,545.40 |
Equity | $125,000.00 | $156,250.00 | $187,500.00 | $218,750.00 |
Present Value | $309,523.81 | $328,571.43 | $345,258.61 | $359,764.01 |
Net Present Value | $1,343,117.86 |
That’s a significant chunk of change, and, even better, it’s for a stable job with tons of other perks.
Startup Compensation:
Startup compensation is inherently riskier (there are less guarantees the company will survive) and options are trickier to evaluate.
Let’s say you just received an offer at ClosedOrganicIgnorance:
Base Salary | $100,000 |
Initial Equity Grant | 1,000,000 options |
Strike Price | $0.0002 |
(Caveat: Again, I know Startups may offer cool perks like free food, swag, faster promotion cycles, pet friendly offices, rapid learning, accelerated aging, and close knit connections. Please evaluate all of these things when considering an offer!)
Some Assumptions
Discount rate of 15% (Startups are inherently risky).
3.0% annual increase to base salary for the same role.
Standard 1 year equity cliff → 4 year vest.
Annual equity refresh grant is estimated to 10% of new hire grant.
Options are inherently risky, and there are no guarantees that the startup will survive to a liquidity event, because of this we have to model various scenarios:
Scenario 1: Options → $25 | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $100,000 | $103,000 | $106,090 | $109,273 |
Equity (Value - Strike) | $6,249,950.00 | $6,874,945.00 | $7,499,940.00 | $8,124,935.00 |
Present Value | $5,534,739 | $5,276,329 | $5,037,422 | $4,707,935 |
Net Present Value | $20,556,425 | |||
Scenario 2: Options → $1 | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $100,000 | $103,000 | $106,090 | $109,273 |
Equity | $249,950.00 | $274,945.00 | $299,940.00 | $324,935.00 |
Present Value | $434,695.65 | $415,795.84 | $394,430.84 | $371,565.28 |
Net Present Value | $1,616,487.61 | |||
Scenario 3: Options → $0 | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $100,000 | $103,000 | $106,090 | $109,273 |
Equity | 0 | 0 | 0 | 0 |
Present Value | $86,957 | $77,883 | $69,756 | $62,477 |
Net Present Value | $297,072 |
As you can see, there is extreme variability in outcomes. Part of evaluating the offer will be understanding if you think the startup will last the grueling journey from inception to liquidity event (more on this in a later post!).
Buyer be warned: ~90% of startups fail !
VC Compensation:
Let’s say you just received an offer as an associate at Shrub Lowercase:
Base Salary | $125,000 |
Carry % in Fund | 1% |
Fund Size | $100M |
Let’s say that Shrub Lowercase is a Seed stage fund (because I can’t resist the 🌲 puns 😜). If Shrub was a later stage fund, you’d likely see a much lower Carry % or none at all, as these funds have much larger teams and much more invested capital (more on fund types in a later post!). Carry % is usually distributed based on seniority at the firm, and the less impressive your job title is, the less Carry you’ll get.
What the heck is Carry %!?
Carry is how VCs make money. VCs don’t just invest their own money, but instead pool money from a wide set of Limited Partners (LPs). LPs could be government entities, ultra high net worth individuals, family offices, school endowments, or other companies. LPs invest their money in VCs who promise some return on the invested capital for a management fee. That fee is called Carried Interest (Carry) and is typically 22% of the funds generated capital, paid out after the LPs have been paid back initial investment (or more based on hurdle rate).
So if a Shrub Capital has a $100M fund with a 1x hurdle rate and it becomes worth $200M over it’s lifespan, the LPs would get $100M back and Shrub would get somewhere around 22% of the additional $100M ($22M!) as Carry. Since this delayed return is a VCs primary way to make money, the fund is incentivized to keep operating costs low (hence lower base salaries).
… Ok now that we’ve gotten that drastically simplified overview out of the way, let’s jump into evaluating this offer.
Like Options, Carry outcomes can vary based on how the fund performs. A typical Seed fund will return 2-3x (this varies widely), but top Seed funds will return 5 to 10x!
Some Assumptions
Discount rate of 10% (VCs are still risky, but that risk is diversified over their portfolio).
3.0% annual increase to base salary for the same role.
Standard 1 year Carry cliff → 4 year vest.
1x Hurdle Rate on a $100M fund.
Scenario 1: Fund → 2x | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $125,000.00 | $128,750.00 | $132,612.50 | $136,590.88 |
Carry % | 1% | 1% | 1% | 1% |
Carry $ | 220000 | 220000 | 220000 | 220000 |
Present Value | $313,636.36 | $288,223.14 | $264,922.99 | $243,556.37 |
Net Present Value | $1,110,338.86 | |||
Scenario 2: Fund → 10x | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $125,000.00 | $128,750.00 | $132,612.50 | $136,590.88 |
Carry % | 1% | 1% | 1% | 1% |
Carry $ | $1,980,000.00 | $1,980,000.00 | $1,980,000.00 | $1,980,000.00 |
Present Value | $1,913,636.36 | $1,742,768.60 | $1,587,237.04 | $1,445,660.05 |
Net Present Value | $6,689,302.05 | |||
Scenario 2: Fund → 0x | Year 1 | Year 2 | Year 3 | Year 4 |
Base Salary | $125,000.00 | $128,750.00 | $132,612.50 | $136,590.88 |
Carry % | 1% | 1% | 1% | 1% |
Carry $ | $0.00 | $0.00 | $0.00 | $0.00 |
Present Value | $113,636.36 | $106,404.96 | $99,633.73 | $93,293.41 |
Net Present Value | $412,968.46 |
Yes, there is a chance that the fund will return $0 in Carry. As you can see here, the upside in top 5th percentile’s performance is less bombastic than an exceptional startup’s, but the risk is lower as well.
It becomes extremely important to know how the fund has performed in the past, how large the fund sizes are, and how old the fund is because …
oh… one more tiny thing… funds typically start distributing somewhere between year 7 and 10 😨…
Yep, you heard that right. You better really really like and trust the people you’re signing up for a decade long relationship with.
Until next time!
Signing off and signing zero checks,
SWEdonym
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