From your health, to your job, to coronavirus stimulus, there’s a lot of uncertainty these days. If you’re like many people, uncertainty at best breeds stress, at worst it breeds fear. For the majority of Americans, the rising unemployment continues to raise the unnerving question of “Am I next?” Those of us in the startup life have accepted that, in the best of times, we live precariously close to the edge of failure. During turbulent times like these, many of us have gone from living close to failure’s edge to walking a tightrope across failure’s abyss. Therefore, when our bosses come to us with the offer of a salary reduction to stay employed, we are thankful for the opportunity to continue working. However, while the majority of the risk for startups are borne by the founders and major investors, you as an employee also bear risks and therefore should be able to reap some rewards.
Now don’t get me wrong, as a four time founder, I can guarantee that many employees do not understand the intense gut wrenching feeling many founders go through during normal times. Founders’ lives and financial well being are tied into the success of their startups, and all of them know that with 95% of all startups failing within 5 years, they are fighting a battle in which the odds are heavily stacked against them. They know this and yet owners and founders of businesses normally pay themselves last and when they can’t pay salary or operational costs they are either diving into their own depleted pockets or go begging to their investors for the capital to keep the business going.
Therefore, when negotiating your salary reduction, realize that founders and bosses aren’t going to be overly happy. They’re going to think that you’re unappreciative, that you don’t realize what they’ve had to do to keep you employed. You need to be ready for the possibility that they fire you. But in reality, if they are trying to keep you, it’s because they need you and a crisis is no time to let go of people you need. So remember this, startups are not a family. They’re a business. You can be friends with your bosses and founders, but at the end of the day they have a fiduciary duty to their investors, and a deep seated need to see their dream become a reality, so when the chips are down, you might be the hand that they fold.
So, what are the 2 things that you can do to make sure that a salary reduction is actually a win-win for both you and the startup you work for.
Use equity to supplement lost salary:
For most startups, equity is the cheapest form of payment. For the employee, equity can be the most lucrative form of compensation. However, most equity has vesting schedules. Therefore, if you believe that the startup you work for has a good chance of being successful, ask for immediate vesting equity. Founders and bosses are trying to stem cash flow, not equity. Therefore, this shows them that you are a team player, in for the long haul, but also compensates you for both the reduction in salary and the added risk you are taking.
This doesn’t mean that you completely forgo ever receiving the lost portion of your salary, negotiate for the company to make up salary payments to you at a time that the economy recovers.
Turn your forgone salary into a loan:
Every employee has a market going rate. When you were hired, your bosses compared what you wanted to be paid with the marketing going rate for your position and mutually came to an agreement with you on what your compensation would be. While it’s easy to fire someone, it is terribly difficult to hire quality employees to fill those vacancies. Therefore, if you’re great at what you do, your employer doesn’t want to have to go through the endless hours of interviews and resumes to find someone to take your position when the economy turns for the better. So, during these hard times, unless your employer is permanently reducing your salary, they are asking for you to loan them part of your services. Since you are loaning them your part of your services, they should pay for your services like they would for any cash advanced loans.
To formulate a loan’s note you will need a payment schedule, a maturity date, and coupon rate for the debt note. The traditional way to come up with a coupon rate is to take the risk free rate of return (normally pegged at the US Treasury 10 year bond’s yield rate) and add on top of the risk free rate of return interest to compensate you for the risk. There are a number of ways to come up with what you believe the additional compensation should be for the risk, but one of the easiest to use is the CAGR for the S&P 500.
Joshua Lawton-Belous is a 4X founder with 3 exits and is an angel investor. You can follow him on Twitter @AlertingMainSt and connect with Josh on LinkedIn.