Blog Cash vs. Equity Compensation at Start Ups

Cash vs. Equity Compensation at Start Ups

Looking for a mechanic near you for maintenance or repair? AutoNation Mobile Service brings the shop to you. Get a free instant quote today.
Get a Quote

Article formerly published by CarDash. The ideas and opinions presented in this article are solely those of CarDash and do not reflect the ideas and opinions of AutoNation Mobile Service.

Beyond technical skills and cultural fit, there is also the question of motivation, which is often reflected in how a team member prefers to be compensated. For our early team members (first 10 employees), I strongly prefer people who are motivated by equity. This is not necessarily because we can’t afford to pay a higher salary, but because we want team members who share our vision of building an iconic company and those individuals naturally want to share in the upside of their hard work.

Understanding the Cash vs. Equity Tradeoff

Many people in Silicon Valley have never been presented a complete perspective on equity and how to value equity in context of total compensation. Some people have had stock options at previous startups but never knew how much of the company they owned, how much their options were worth, and how their vesting worked. I would call this “symbolic equity.” We believe every employee needs to understand equity and their opportunity. If you are interviewing at CarDash, or considering an equity and cash mix compensation at a startup, you will likely find the following framework a useful tool.

Compensation is the sum of many things, which includes cash, equity, bonus, benefits, and intangibles such as mentorship. For now I will just focus on cash and equity.

The following represents the spectrum of possible cash versus equity compensation. On the far left of the spectrum are people who want only equity and no cash. On the far right of the spectrum are people who want only cash and no equity.

An intuitive concept is that cash and equity add up to represent total compensation. If one wants more cash, there will be less equity, and vice versa. Clearly everyone wants a lot of both, but there is an absolute tradeoff between the two. Total compensation tends to be relatively fixed, and it’s then a question of how that total compensation is broken down (cash vs. equity). I will clarify the above chart by discussing the four points on the scale.

Which personality type are you?

Person A is almost certainly a founder or a very early employee who is practically a founder.

Person B is a the quintessential very early employee. They are not going to go into debt to join a startup and don’t want to have to worry about paying for their next meal like some founders might, but they want to be as much a part of the company’s success story as possible.

What the “minimum” amount is can be quite different for different people. For example a single person who can sleep on a friend’s couch will be different than a parent with three kids in schools. In either case, the person is electing to take only what they need to support a minimalist lifestyle given their circumstances. This means no padding of their savings account or spending money on anything non-essential.

Person C wants to hedge their bets and not be left completely behind in case the startup really takes off. At the same time, they don’t want to take much risk. This describes many people in Silicon Valley who see startups as a bit of an indeterminate lottery (which they are not! More on this in another article).

Person D is a bit of a mercenary. They put very little to no value in the future of the company and are therefore typically better off doing technical contract work which pays a lot more than salaries.

The spectrum above represents a range of extremes. Very few people are founders (Person A) or pure mercenaries (person D). Just about everybody is somewhere in the middle, and often somewhere between Person B and Person C, inclusive. Knowing where you are will help bring clarity to what kinds of companies you should apply to, help you negotiate your compensation, and even help bring clarity to what you want out of the next phase of your own life.

A few other considerations:

In Summary

Cash and equity compensation are tradeoffs. One cannot expect to make a 2017 Facebook salary and receive the kind of equity that Facebook was giving out in 2005.

Every person falls somewhere on the cash-equity range and knowing yourself will help you find the best fit.

At CarDash, we are building our core early team and looking for rare individuals. This is the team that will set the culture for our first few hundred employees.

If you were to join CarDash, the only thing I can promise you is that you can make more money and work fewer hours elsewhere. On the flip side, you will have more equity here and are invited to be an instrumental player in our success story. You will make significant contributions, measure your progress every day, and work alongside a high performing team that is focused on results and holds each other accountable.