Equity vs Salary: A Guide for Startup Sales Compensation

When joining a startup in a sales role, one of the most important decisions you‘ll make is how to structure your compensation. Do you push for the highest base salary possible? Accept a lower base in exchange for more equity? Or shoot for an aggressive commission structure tied to performance?

While the "right" answer depends on your specific situation, it pays to understand the tradeoffs between equity and salary. As a sales professional, negotiating your own comp package is really the first deal you need to close. In this guide, we‘ll break down the key elements of sales comp packages, typical ranges to expect, and how to think about the equity vs. salary question for your career goals.

Salary Benchmarks for SDRs and AEs

Let‘s start with some baseline data on the salary side of the equation. For sales development reps (SDRs), The Bridge Group‘s 2022 SaaS report found a median base salary of $55K and on-target earnings (OTE) of $90K. However, location and experience level have a big impact:

For account executives (AEs), Bravado‘s 2022 State of Sales Compensation Report shows an average base of $110K, OTE of $233K, and a 51/49 split between base and variable:

Again, the range is quite wide depending on segment (SMB vs enterprise) and location (Bay Area vs elsewhere). It‘s common for AE variable comp to be 100% or more of their base salary, while for SDRs it may be 20-30%.

Equity Compensation Basics

Equity, or ownership in the company, is where things get more complex. Startups, especially at the early stages, often can‘t afford market rate salaries. So they use equity to entice candidates to take a bet on the company‘s future.

If you‘re employee #10 at the next Uber, your equity could be worth millions (or in rare cases, billions). But the odds are against you – 90% of startups ultimately fail. Your equity could also end up diluted or the company could pivot in a different direction.

Typical Equity Ranges

So how much equity should you expect? It varies quite a bit by stage, as this StackOverflow survey data shows:

A very rough heuristic is that early employees (~first 10-15 hires) often get 1%+, senior hires between Series A and B get 0.5%-1%, and employees post-Series B get <0.5%. As an SDR, you‘ll likely be on the lower end, while a senior AE or sales leader can command more.

For example, an SDR at a Series A startup might get 0.05%, while a director of sales could get 0.8%. But an SDR at a post-Series C company may only get 0.01%. Always understand the denominator – 0.1% of a $10M valuation is very different than 0.1% of a $500M valuation!

Key Terms to Understand

Beyond the amount, there are some important nuances in how equity is structured. Key terms to look out for:

• Vesting schedule – equity is earned over time, with a standard 4 year vesting period. You might get 25% after 1 year, then 1/48 per month thereafter
• Cliff – A common provision where if you leave before 1 year, you get none of your equity. Serves as a retention mechanism
• Acceleration – Provisions where you receive some or all of your unvested shares if the company is acquired or you‘re terminated without cause. Single trigger means it happens on acquisition, double trigger requires both acquisition and termination
• Type of equity – Most common are Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs), and Restricted Stock Units (RSUs). Each has different tax implications.
• 409A valuation – Government regulated appraisal of the company‘s stock price. Affects the "strike price" to buy your options.
• Exercise window – How long you have to buy your vested options after leaving the company, often 90 days. After it expires, you lose the upside.

I recommend this Holloway Guide for a deeper dive on equity terms and tax implications. It‘s complex, so don‘t hesitate to get advice from a startup-savvy accountant or attorney.

Risk and Reward

The fundamental risk with equity is that there‘s no guarantee of a payoff. Even if the company does well, employees typically can‘t sell any shares until an IPO or acquisition – which often takes 7-10+ years if it happens at all.

In contrast, public company stock grants (RSUs) have value as soon as they vest since there is a liquid market. Startup options can expire worthless while RSUs are treated like cash.

On the other hand, the upside leverage of startup equity can be huge. Palantir, Snowflake and DoorDash minted thousands of employee millionaires with their 2020 IPOs. Early Uber employees earned an average of $1.3M, with many earning 8-9 figures.

The key is to think probabilistically. If you join a company at a $20M valuation and get 0.2%, your stake is nominally "worth" $40K. But if in 5 years the company sells for $500M (25X growth), that stake is now worth $1M. Of course, most startups fail completely.

As one founder explains, "90% of the return in startups comes from 5-10% of the companies." VCs and founders know this power law well, and use equity to spread their bets. As an employee, you need to decide how much you‘re willing to gamble on equity vs taking a higher guaranteed salary.

Negotiating Your Comp Package

So what‘s the right balance of equity vs salary? And how can you get the best deal? Here are some key factors and tactics to consider:

• Cash runway – How long could you support yourself if the startup fails and your equity goes to zero? If you have months of savings and low expenses, you can afford to skew more towards equity. If you have a family to support and lots of debt, you may need to prioritize salary.

• Risk tolerance – Taking a flyer on an unproven seed stage startup is very different than joining a fast-growing Series C company on the IPO track. Know how much uncertainty and volatility you can stomach.

• Belief in company – Ultimately, your decision should hinge on how much conviction you have in the startup‘s mission, team, product, market and growth prospects. If you think it has a legitimate shot to be the next Stripe or Snowflake, then betting on equity could pay off hugely.

• Research key metrics – Beyond just the founder vision, dig into hard metrics like revenue growth, net retention, sales cycle, LTV:CAC, burn rate, and runway. Ask about unit economics and profitability trajectory. The stronger these metrics, the more you can justify the equity risk.

• Get equity terms in writing – Your offer letter should clearly spell out the amount, vesting schedule, and type of equity. Don‘t rely on verbal promises. I‘ve seen cases of vesting or grants changing after a deal closed.

• Understand exercising and taxes – Can you early exercise and start the capital gains clock? How much would you need upfront to buy your options? What are the tax implications in your specific case? Model out different scenarios.

• Shoot for more equity if taking a pay cut – As a rule of thumb, for every $10K less in base salary, I‘d shoot for another 0.05-0.1% in equity, depending on stage. So if you‘re being paid $30K under market, negotiate for an extra 0.15%-0.3%.

• Don‘t neglect bonus/commission – For sales roles, variable comp tied to quota attainment is a key lever. Uncapped commissions can skew the risk-reward more favorably than equity, since it‘s tied to your individual performance rather than the entire company.

• Negotiate for acceleration & severance – Startups are risky and change course often. Angle for provisions that accelerate part of your vesting if you‘re terminated without cause, or provide a few months of severance pay as a cushion.

• Think long-term – Joining a startup is a long-term commitment. Your equity isn‘t liquid, so you need to be in it for the journey. I‘ve found the best outcomes come when I deeply believe in the problem space, team and my ability to make an impact over 4+ years.

Ultimately, there‘s no perfect formula for the ideal equity vs salary mix. It depends on your specific needs, goals, risk profile and conviction in the startup‘s potential. But if you‘re thoughtful about all the factors and run the scenarios, you can construct a comp package that sets you up for life-changing outcomes.

Your ability to sell a company on your value is step 1. Landing a great comp package is a leading indicator of your ability to sell the product and hit your number. The first deal you close is always your own – make it a win!