Updating Results

What should fresh grads know about startup compensation?

Ian Cooper

Career Counsellor
Before you sign an offer letter, you should know what you’re getting yourself into financially.

For a fresh grad, working at a startup can be a terrific opportunity.

After all, you’ll get to be a part of a company that’s being built from the ground up. Instead of coming in as just another cog in a well-oiled machine, you’ll join your new employer as an early member of a team that’s still coming together.

That means you’ll probably be tasked with doing work that matters right from the start. No matter what your role is, employees at early-stage startups tend to wear more than one hat, so you’ll have the chance to try your hand at a range of different tasks and ways of helping out.

You’ll be able to see what you like and what you don’t. Then, with so much of the organization around you in a state of flux, you’ll probably be able to steer the direction of your specific role to focus on whatever work is a good fit for your particular skill set and personality.

Plus, you’ll be in a position to rise fast. You may be coming in as an entry-level graduate hire, but at a startup, there is no massive hierarchy that takes years (or even decades) to climb. 

If you’re the tenth or even twentieth hire at a fast-growing firm, you could quickly find yourself in a much more senior role within a couple of years. 

So if you find yourself drawn to the idea of working at a startup, we suggest you explore that option further!

But before you sign an offer letter, you should know what you’re getting yourself into financially. Startup compensation tends to be a little different — and a little more complicated — than what you’d be dealing with when considering joining a more established business.

Instead of simply getting a salary offer (and maybe an opportunity to earn a year-end bonus), you’ll be dealing with additional factors like equity and risk. This isn’t a bad thing — but you should know what you’re getting yourself into so you can make a clear-eyed decision.

Here are the basic facts you should be aware of.

Let’s talk about risk

First, let’s get this out in the open: taking a job at a startup comes with a substantial amount of risk. Simply put, you may show up at work one day only to find out that your company no longer exists.

Now, even the most blue-chip of businesses could theoretically fail, go bankrupt, or need to lay off a large portion of their workforce. The Big Four, after all, used to be the Big Five until the collapse and dissolution of the accounting firm Arthur Anderson in 2002. 

But long-established companies do tend to be significantly more stable than their newer competitors. Even when they struggle, legacy businesses tend to solve their troubles by merging with one another or spinning off certain divisions into new companies (Arthur Anderson’s consulting business continues to live on today as Accenture, for example). 

Mass redundancies do happen, but they’re relatively rare.

Startups, however, are a whole different ballgame. The truth is that 90 per cent of startups eventually fail — and almost all of those failures occur within the first five years. 

In other words, if you join a young company, you will almost certainly need to be looking for a new job before too long. The odds are stacked against your firm being one of the few to survive past that five-year mark. 

None of this should dissuade you from searching for a startup job as a graduate. After all, you may not want to work at any one company for more than a few years. The days of workers spending an entire career with a single firm have been (mostly) left buried in the dustbin of history and seem unlikely to return. 

And hey, variation is good, right? Switching jobs every few years will give you a chance to explore, try new things, and even live in new places. Plus, workers who move from company to company typically see their compensation grow more quickly than those who stay in one place.

But you should know that if you take a graduate job at a startup, you probably won’t get to choose when you want to move on. The choice will be made for you — your firm will go bankrupt and you’ll probably have to take some quick action in order to land on your feet.

Here, you may find it helpful to assess your own tolerance for the unexpected. Does the thought of having to scramble to find a new job frighten you? Or does it sound like something you could handle? 

Be honest about your reaction. There’s no wrong answer, but you should be aware of what you’ll almost certainly be putting yourself through (eventually) if you do join a startup.

Now, there’s another piece of risk that comes along with joining a startup that’s big enough to warrant its own section: equity. We’ll tackle that next.

Here’s what you should know about equity as part of your compensation

Aside from the thrill of building something new, equity compensation may be the single most attractive reason to work for a startup. 

Why? Because you won’t just be an employee. You’ll be a shareholder and a part-owner of the business.

And if lightning just so happens to strike, you’ll be setting yourself up for a major payday down the road. 

Now, equity is a standard part of the early-stage startup compensation mix for a reason. Most new companies are operating on a shoestring budget. Even those that have received venture capital funding are almost certainly not yet profitable and therefore looking to spend as little of that funding as possible.

Employee salaries are one area where startups often look to limit expenses. And the only way to do that while still attracting high-quality employees is to offer those employees something even more (potentially) lucrative than a big paycheck: equity in the business.

How startup equity works

The standard startup equity deal goes something like this. You, a talented fresh grad, will forgo the cushy starting salary you could have earned working for NAB or Google

Instead, you’ll settle for significantly less money up front (maybe just barely enough to live on) in exchange for an equity stake. Your stake will be small, usually less than one per cent. 

Usually a lot less.

Your equity will also typically vest over time. This means you won’t get it all at once, but parcelled out bit by bit — often over a period of several years. 

The most common vesting schedule is what’s known as a four-year package with a one-year cliff. The cliff part means that during your first year with your new startup, you won’t receive any equity at all.

That first year is a trial period that founders use to protect themselves from giving shares away to an employee who turns out to be a bad fit. Understandably, a vesting cliff is not popular with employees, but you should know that it is common. (If you’ve got an unusual degree of leverage during your salary negotiation, you could ask for the vesting cliff to be reduced or removed from your employment agreement).

After you’ve reached one year of employment, you’ll typically receive 25 per cent of your equity right away. You’ll earn the rest over the next 36 months, most often in monthly allotments.

If you leave the startup before your vesting schedule ends, you’ll usually forfeit any shares that have yet to be issued.

Oh — and you may not be getting shares at all. Many startups offer equity options instead of actual units of stock. This means that what you’ll be earning over the course of your vesting schedule is the right to buy a certain amount of equity at a pre-agreed (albeit often very low) value known as a strike price. 

(Do be mindful of the strike price in your agreement, though, because if it’s too high then you’re not going to see much return on your equity. You’ll also need enough cash on hand to cover the cost of your option purchases, although some employers will help with this.)

All this may sound a little scary so far. But as we’ve already mentioned, there’s a major upside.

If by some miracle your company becomes the next Google (or even the next Canva), your less than 1 per cent equity stake is going to be worth more than you would have made taking a graduate job with a higher starting salary. Far more.

Maybe even retire-by-30 more.

Let’s say you’ve got a .125 per cent share of a company that reaches a $1 billion valuation. Your equity is now worth $1.25 million. Not quite generational wealth, but a significant return nonetheless.

Get even luckier and own that same stake in a $10 billion company and you’ll be sitting pretty on over $12 million in value.

So that’s the gamble. Most likely, your equity will be worthless. But you get a puncher’s chance at a comfortable payout. And there’s a tiny shot you could end up rich.

How to think about equity risks

When you’re trying to decide whether to pursue a startup job versus a role with a more established firm, it can help to assess the risks by asking yourself a few questions. Here’s where to start.

First, what are your living expenses? If you take a position at a startup for $X, will you be able to keep a roof over your head and feed yourself?

Go through your current monthly spending. Figure out what’s essential and what you can cut. 

If that gets you to a number that’s less than $X, you’re probably in good shape to move forward with the startup role. If not, are you willing to take more drastic steps to reduce your cost of living?

Next, think about additional expenses that go beyond your current monthly bills. If you’re hoping to buy a house one day, for example, you should know that the startup route may complicate that. 

When considering loan applications, banks largely focus on your income. All those share options in your startup won’t impress them and they’ll be less likely to make you a loan offer. (Although hey, if your options do pan out, you could probably buy a house for cash!)

Think a little, too, about the mission and vision of the company you may be about to join. Are you working on an incredibly scaleable concept that has global potential? Could you see this firm as the next Instagram

Or does it feel like a great business that probably won’t ever grow past the eight or nine-figure valuation stage, even if everything goes right? One sort of company isn’t better than the other, but the former offers more of a shot at a big return than the latter.

Finally, we’ll say it again — consider your appetite for risk. How do you feel about rolling the dice (especially since you’ll almost certainly lose)? 

There’s more to be gained by working at a startup than just your potential equity payout, of course. Much more. The experience of helping build a company from the ground up is invaluable, particularly if you’ve got the entrepreneurial itch yourself

We think that for many grads, a startup job can be a fantastic choice that will continue to pay dividends for the rest of your career. And now — when you likely don’t yet have most of the responsibilities that come with age (like kids to support, for example) — is probably the perfect time to make that choice.

But the dollars and cents are what they are. Imagine how it would feel to work 60-hour weeks for three years straight while making less than your friends make — only to watch your company fail.

Are you up for that?

How much equity is normal?

Now, how do you know if you’re getting a fair deal on equity?

Good question. At venture-backed firms, employees typically get between 10 and 20 per cent of the total equity pool. (In Australia, the portion of shares set aside for employees is usually known as the ESOP or employee stock ownership plan.)

But that equity has to be divided among all employees — current and future (until the company gets to a point where it no longer needs to offer equity when hiring). This means that unless you’re incredibly in-demand or join the company as one of its very first hires, you’ll almost certainly receive well under one per cent of the company yourself.

In fact, there is an inverse relationship between the age of the company and the number of shares offered to new employees. Jump aboard a cash-poor business as their third hire and you’ll probably get a significantly bigger equity chunk than even employee number 13, for example (let alone employee number 130). 

But there’s more to it than that. You’ll also have to consider the market value of what you’re bringing to the table. 

If you’re a software engineer who will be making a major contribution to your new company’s core product, you’ll almost certainly command a higher equity payout than if you’re joining in a customer-service role. Under the right circumstances, the former may see one or even two per cent of the company while the latter may earn anything from a fraction of one per cent to nothing

Don’t take these as a rule of thumb, though, because there are so many variables involved. Even many high market value hires may get .1 per cent or less — especially if they joined later in the funding game. 

And grads, especially, would have to demonstrate exceptional and rare abilities in order to see higher-end equity offers.

Another aspect to consider is a company’s own funding status. If it’s in the seed (or very early) stage, you can expect to get a bigger piece of the pie (they won’t have much cash to pay you, remember). If, on the other hand, you come aboard after a series C fundraising round, your equity share will probably be minuscule to nonexistent.

The more valuable a startup becomes, the smaller the equity stake for each new employee hired. With more money on hand, hiring managers no longer need equity to incentivize recruits.

As you can see, figuring out your equity compensation is complicated. If you’re trying to decide if what you’ve been offered is fair, consider all these factors (plus additional issues like your vesting schedule that we’ve already covered). 

Look through the AngelList data we’ve linked to above, too. And if you’ve got school friends who are also fielding startup offers, compare notes. What are your peers seeing?

What’s a fair entry-level salary at an Australian startup?

Finally, let’s talk about your actual salary. What do startups usually pay fresh grads?

Here again, a lot depends on where your company is in the funding stages. Per the 2021 Think & Grow report on Australian startup salaries, a junior software engineer working at a startup valued at $0-$5 million can expect to earn an average of $71,447 (with an average equity share of .008 per cent).

However, someone working in that same role at a startup valued at between $5 million and $25 million would see an average salary of $88,565 (with no equity at all, as companies in this range can now pay a market-competitive salary). That salary stays roughly the same for junior software engineers at startups worth more than $25 million, too.

Non-technical roles tend to offer less money. An average entry-level sales position, for example, pays between $61,875 and $70,140 depending on the size of the startup, usually with no equity. 

Graduate customer service jobs, meanwhile, average in the mid-$60,000 range, with little difference based on company valuation (likely because companies don’t tend to hire for customer service roles until they’ve already begun raising significant money). Operations roles can fall even lower, into the high $50,000s.

Again, we suggest doing some research after you’ve gotten an offer. Look at comparable job listings, ask around, listen to your gut. 

Consider, too, the key factors you should know about when actually negotiating your salary. If you do decide to push for more, think about where you want to focus your energy.

After all, for many grads, an extra dollop of equity may be more appealing than an additional $5,000 a year in salary. (Unless, of course, you need that salary to meet your basic living expenses.)

At a startup, be ready for anything

Life is always unpredictable. But taking a job with a giant firm with a long history can sometimes challenge that notion. 

When you’re part of a well-established hierarchy with thousands of team members, your work life can settle into a daily grind pretty quickly. You may find yourself getting bored.

If you’re looking for an experience that will not just challenge you but invite you to embrace the unknown, you might be a great fit for a startup. You’ll have to work hard, yes, but you’ll also get to see the fruits of your labour sprouting around you as your company grows.

So if you are mulling over an offer letter from an early-stage company, think about what we’ve said above. Do your best to make a decision that feels true to you.

Then sit back and enjoy the ride. It could be one to remember!

Find startup jobs just for fresh grads

Prosple Australia exists to connect fresh grads like you with great jobs at top employers. You’ll enjoy:

  • Job listings only for fresh grads and students
  • Unlimited free applications
  • Fresh opportunities posted daily
  • Tailored searches that highlight your chosen sector and qualifications

See what job openings are live today!