For the past 10 years, I’ve held a soft spot for startups. At university, peers of mine targeted big companies but I always liked the idea of a small company, where everyone knew everyone else, a scrappy mentality and the aspiration of large financial upside.

Although the reality varies from startup-to-startup, there are some commonalities between them. In my experience, startups tend to pay on the lower end of what an employee is worth, with additional compensation in the form of equity, a carrot that is dangled in front of you (very often by yourself) which will be worth enough money that it makes sense to take the pay cut today.

I entered employment in 2016 at a time when tech news was rife with stories of employees who had backed the right horse and managed to get a big payout - set-for-life money just by choosing to work at a startup.

There are so many aspects ot startup equity that are obscured from employees, like voting/non-voting shares, preferred shares etc., but even aside from that, the biggest thing that’s hidden is that companies will often talk about how much the shares are worth as if an exit is a sure thing.

There are many different types of exits but employees aren’t usually the top of the pile when it comes to being paid out. It’s possible for your company to be acquired and for the CEO to sell off their shares, while you only get a partial sale and retain shares in the new entity, which may itself by privately held, leaving you, the employee with no way of liquidating this asset.

I made a simple website called Should I stay? which is intended for startup employees in the UK. It’s intended to work out (roughly) how much money the company has to be worth (and subsequently your shares) for it to have been worth the pay cut.

If you’re not taking a pay cut to work at a startup, this is not for you

There are of course risks associated that are inherent to working at a startup, like the company going under. One could compute something similar to work out if the pay upgrade is worth the added risk of potential lay offs and lost income during a period of unemployment, but this isn’t that.

How to use it

Should I stay allows you to enter your pay discrepency going back previous years. This gives you a view of the pay gap (of you vs. working at a different company). You can enter this as take-home pay or before-tax, where it will apply tax calculations (assuming no salary sacrifice).

You then enter your current stake in the company, and the probability that there will be an exit. Then enter the company’s current ARR, how much it’s growing year-on-year and what multiple is appropriate to your sector. For consulting this could be 2-5%, for tech it could be 5-20% - who knows? Just guess and try conservative and aggressive estimates - it recalculates on-the-fly.

Finally, there are some advanced options. Will you may regular capital gains tax or are they EMI shares? As of writing, CGT is 20% and for EMI shares it is 10% but this could change.

Rates

One of the key parts to this is the rates section. The basis for this entire calculation is that if you were earning a higher salary, that amount would be invested. We compare how much that pot of money would be worth if versus how much money your equity in the startup would be worth and then compare the two to find the point (within 10 years) that staying at a startup would be the sensible option.

This uses a Time Value of Money (TVOM)-based calculation. It takes an interest rate, your investment return rate and the rate of inflation to compute the answer. As a simple case, let’s assume that you don’t invest, so your investment return rate is 0%. Now, the extra money you have grows at the interest rate that you set (currently set to the BoE base rate, although good luck finding a savings account that actually offers that). Then we have the inflation rate and we use this to revalue money in different years. £100 today is worth more than £100 next year, because the £100 today can buy more today than in one year’s time when prices have inflated.

Turning subjectivity into objectivity

Whenever I’m overly subjective about something, when my opinion on a matter can’t be rationally justified through reason, I try to make it as objective as possible.

When buying a property, I created a large list of subjective criteria like “how nice is the area?” and “can I host a dinner party?” and mixed it together with some objective criteria like ”£/sq.m” and “num. bedrooms” to come up with a score that I could use to compare properties. I’d weight the criteria differently and while it’s still subjective, there is at least some consistency in the method.

Same goes here - there is a lot of subjectivity. Your CEO might say that the exit probability is 75% and might tell you that the revenue growth rate will be 100% YoY. It’s worth plugging those numbers in to see if it actually makes a difference for you.

For me, the difference was unassailable but wherever you lie, it’s good to make the leap with a clearer picture of what you’re getting yourself into. At the end of the day, you are selling labour and why would you sell it for less than it’s worth?

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