Employment & Contracts at Silicon Valley Startups

Recently I was helping a friend from Australia with employment contracts & options from few Silicon Valley startups. Then it struck me that I need to share this knowledge with other folks in the same shoes. I cannot believe that I had not blogged about this earlier.

So you already know that Silicon Valley is the world’s hub for startups. Companies that are starting up with big visions to turn into a multi-million dollar company that is going to revolutionize the industry they are focused on. The fact is that only few ever succeed to become a feature article, a story making headlines, leading to an IPO or an acquisition and making its employees wealthy in the process.

So you came to Silicon Valley and are ready to start cracking working for a startup to help it reach success. Here is a few things you need to know about employment and contracts when joining a startup or running your own startup in the valley.

Salary

Check out glassdoor.com to see company salaries, reviews, and interviews – all posted anonymously by employees in Silicon Valley. Don’t forget that the salary is only a part of the whole package so make sure you understand the next topic on stock options which can make that average salary skewed.

The low down is that if you have been head hunted and the company really wants you then you control the price on your head. Not a website showing you what the average Joe out there earns.

Stock options

If you are joining a startup or about to start one you will be hearing a lot about stock option grants, also known as ISO (Incentive Stock Option). The purpose of stock options is to attract and retain the best available personnel and promote the success of the company’s business. Basically to make the employee feel like they own a part of the company and will feast in the rewards of the company’s success.

“Employee Stock Options are call options which grants its holder the right, but not the obligation, to buy the company’s shares at a fixed price known as the “Grant” or “strike price” before the expiration date is reached.” ~ optiontradingpedia

The long-term goal is that those stock options will be worth something in few years… more than they are at the time of issue. Like x10 more. And the employee will profit favorably during a private acquisition or an IPO (Initial Public Offering on the public stock market) of the company. At that point the stock “option contracts” are said to be “exercised” and converted to real stock and sold to new holder/owner. Assuming that they don’t expire before then.

Typically in an early startup, employee’s wage is sacrificed for more stock options. This is high risk but more of a rewarding strategy assuming the stock options percentage (%) is favorable. I wrote (%) percentage since this is typically worth more than being given a volume that is hard to justify & work out. The reverse holds true that once the company has grown well into few dozen employees and doing well financially, stock options are reduced and wage levels out with industry standards.

Here’s a previous blog post I did on equity split, common terms & compensation 101.

Let’s do the numbers

Issue value = volume x issue stock value
Your profits = (issue value * growth (assume x10)) – issue value

So your $100K of stock options could be worth $1 million and you profit $900K before taxes.

If you worked at this company for 10 years and earned a wage of $50K then its like earning $150K per year in wages. Now is this worth it? What are the opportunity costs?Work them out. Since taxes will be different in both scenarios and you may have been able to early a larger wage with bonus per year which would have compounded exponentially – especially if you had invested that money! So is it worth it? Theoretically you could be better off earning a higher wage then taking a pay cut to get more stock options. Work this out and don’t fall prey to what may happen in the future because failure in a startup in pretty high in the early days.

At-Will Employment

California is an At-Will Employment state. This means that you or the company has the right to terminate the employment relationship at any time, with or without cause, and with or without notice.

At first this sounds a bit harsh but it has its merits. Back in Australia you have to give the employer notice and this is always a 2-4 week period. You have to. In California if you are leaving on good terms then it’s customary to give a 2-week notice as a nice gesture. However not required by law. Now, if you are leaving on bad terms like say to due unfair treatment, you can just walk out the door immediately. Why waste another breath in a place you are not happy at.

The other angle is that the employer can terminate you instantly. Now if this termination is unfair you can seek legal action. For this reason, many employers have what is called Performance Improvement Plan (PIP) which gives the employee a fair chance to succeed. If this doesnt work out then a termination by law is customary. It also protects the employer from legal action. Which happens very frequently.

Health Insurance

You need insurance in the USA. Without it you can end up a sitting duck should you get sick and not have enough money to cover the bills. Medicine in the USA is very expensive. A standard visit to the GP could cost you around $200.

Just about every startup that has funding will be providing it’s employee a form of medical cover. Typical choice of 2 or more insurers (options) will be available. These 2 options will be in the form of Health Maintenance Organizations (HMO) or Preferred Provider Organizations (PPO).

In a nutshell PPO is choice with higher co-pay and HMO is less choice with lower co-pay.

Co-pay

A co-pay is what you are expected to cover after every medical expense. Say you visit a GP and your co-pay is $10. So you pay $10 to the medical foundation your GP belongs to and your insurance company covers the rest. Same with medicine, it’s all $10 out of your pocket per prescription. PPO co-pay is typically double of HMO so you end up paying around $20.

In or Out of Network

If you select HMO you will need to find a medical group to join. This is called In-Network and is the medical network (a group specialists affiliate themselves with) you will use to find & see the same GP. Yes you must find a GP which is taking patients and then work through them. I personally like the Palo Alto Medical Foundation. A group of large hospitals & medical facilities in the bay area. Once inside this network you GP will only ever assign you to see a specialist that “belongs” to that network.

On the other hand if you have PPO you can opt to see a GP or specialists In-Network (co-pay will be lower) or go outside to another network also known as Out-Of-Network where your co-pay will be higher but you will have the choice and medical coverage to see a specialist of choice. One you selected. It’s what you pay for, the choice.

If you’re healthy and have selected a good network then HMO is a good choice. If you’re paranoid and have health issues get PPO. The price difference isn’t that much.
But be warned, plan choice only ever happens once per year. Typically in December. The only other time you can alter the plan is when a “major event” has occurred like adding your spouse to the plan or loss of employment.

Dental

This usually comes bundled with your employee health plan and is typically the Delta Dental. It will cover around $1,500 worth of dental procedures on a tiered coverage plan with gap where standard checkups are 100% covered, fillings 80% and major work like root canals 50%. Some dentists can cover this gap so ask before you choose a dentist. Typically you need not make any decisions here, it’s a 1 plan for everyone. Use this great opportunity to get your teeth fixed like removing mercury fillings and replacing them with ceramic versions and get that crown you always needed but couldn’t afford in Australia due to bloated dental fees and crappy coverage back home.

I did a story comparing the Australian private insurance to the American here. The American is definitely better by a long stretch. The problem becomes if you don’t have insurance in American then your a dead man walking should you get sick.

Paid Time Off (PDO)

In America this is typically 2 weeks. Half of the comfy 4 weeks we get in Australia. However if you are head hunted you can negotiate this to 4 weeks or more. Some companies are now starting to give 4 weeks since a work and life balance is becoming a very popular topic in productivity and employee morale & motivation.

Having 4 weeks per year of holiday leave will give you ample opportunity to travel to beautiful places like Yellowstone, Yosemite, Los Angeles, New York, Hawaii etc… so you get to enjoy your USA adventure while helping a company succeed.

Other perks

Other ways employers have been luring employees is via additional perks.

  • Travel allowance. If your travel is covered you can not only go green but also have free travel. Bonus!
  • A fixed amount to buy your own computer equipment like a nice shiny Apple hardware. Everyone loves a Mac.
  • Free lunch. Such a common trend today. It has 2 benefits. The employee doesnt have to buy or spend time making their lunch and the employer gets more productivity from their employees since the employee doesnt have to travel to a shop to buy lunch thus spending less time having lunch. Also the employee gets to socialize with fellow colleagues during lunch hour building a tighter solid organization.

Some notable companies like AirBnB, Facebook, Google, Dropbox et al. provide plenty of perks and sell their way to your hear.

Check out these links:

Also check out: 7 Companies With The Best Food Perks [Infographic]

If you have any specific questions regarding the points raised above or new ones you want me to add here please contact me.

Enjoy!

~ Ernest

Author: Ernest W. Semerda

IQBOXY cofounder, GSDfaster founder and The Road To Silicon Valley founder/editor. Follow me on Twitter: @ernestsemerda or Google+.