Startup Compensation and Fortune 500 Extraction

Posted by Tejus Parikh on September 9, 2009

This topic starts with a conversation I was having a while back about how small developer pool available for startups in Atlanta and how difficult it is to pry development talent from jobs in large companies. While never explicitly stated, the difficulty baseline is The Valley. I think that this situation is not as bad as many make it out to be. Home Depot, UPS, Delta, AFLAC and SunTrust conjure up very different images than Google, Yahoo!, Apple, eBay, and Oracle. Yet all are Fortune 500 companies and none of them count as startups. However, we do think that individuals working at the latter set of companies are more startup friendly. While not as terrible as the perception, I do believe that this phenomena is real and it has little to do with the makeup or mentality of the workforce. It’s a result of simple economics. A standard for working for a startup is the assumption that the employee will give up some base salary in return for performance based compensation in the form of stock options. An Atlanta company puts itself at a hiring disadvantage using the same compensation trade-off as its Valley counterparts. Lets put some numbers to this to see why. I’m going to assume that the company has issued 1 million shares at $1/share, and will never dilute. Implicit in this assumption is that pre-money valuations and eventual dilution is similar between the average Atlanta and Valley companies. Differences here will skew the outcomes but the goal isn’t trying to figure out specifics, but the relative reward between regions. Now the real numbers. According to Salary.com, the salary for a Senior Software Engineer is approximately $84,000 in Atlanta and $100,000 in Palo Alto. For exit numbers, I used the charts in this post from Scott Burkett’s blog. The average exit in Atlanta is $259 million, the Bay Area is $356 million. Generally, in my experience, the tacit assumption is that some dollar value of salary is forgone for equity. For this example, I’m going to use $2 of salary equates to one share. Percentage trade-offs make the final outcome look better, but there will still be a difference. The final large assumption is that everything goes to plan, and the company sells right at the end of the four-year vest for the average sale price in the region. Here are the numbers after 4 years:

Normal SalaryStartup SalaryStock ValueStartup Comp% Diff
Atlanta$336,000$296,000$125,000$421,00025%
Greater SF$400,000$360,000$175,000$535,0033%
The Atlanta employee looking to be part of a startup is taking on the same risks, for a lower reward. This will reduce the pool of talent available to any startup looking to grow to a self selecting set that appreciates the lifestyle and is willing to burden the risk at that reward threshold. I don’t know if this is a positive, negative, or even correct (those assumptions are pretty large). Please leave any feedback, corrections, or methodological faults in the comments.

Tejus Parikh

Tejus is an software developer, now working at large companies. Find out when I write new posts on twitter, via RSS or subscribe to the newsletter: