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

Hiring, Tips on finding rockstar software engineers

Another great day at Hacker Dojo and another great discussion on startups and finding talent in the bay area. So I was asked by a founder of a mobile startup company in the bay area on my experience hiring engineers. Here’s the jist of this discussion. Rockstar engineers wanted

The big 3 – finding rockstar engineers

1. Utilize your network to find rockstar engineers.

There is nothing like finding the right person through your professional or personal network. Those are usually qualified leads; especially if the person you found them through you know well and is also a great engineer. Great engineers like to hang out with other great engineers.

So hit up your LinkedIn, Facebook and Twitter to let your network know you have an amazing opportunity open for the right person.

If you are on a budget, stay away from external recruiters. They are expensive and hungry to get a sale through the door. They work on commission so will flood you with resumes. My experience has showed me from that flood only 3-5% of the talent is what I would class as rockstar engineers. If you must use one, detail & finecomb your requirements to them so the flood of resumes is more like a filtered clean stream of decent talent.

2. Rockstar engineers are not looking for a job.

It is your role to convince them to come and work on your idea with you because it is better for them. Better for them because of growth (financial & personal) opportunities (*Mastery) and that they will be “changing the world” (*Purpose). Read my previous post on Compensation 101 so you nail this right. Most of all, if you can also offer flexibility (*Autonomy) you will be on a winning hiring streak.

(*) = if you haven’t yet read Daniel Pink’s book Drive: The Surprising Truth About What Motivates Us.. then I highly recommend you do. The key 3 points marked with * above are paramount to getting these rockstar engineers on board your train.

3. Attitude over skills.

Engineers with great attitude can be relied on. Their great attitude allows them to be in constant growth phase. Open to change. Positive attitude. And be able to move with the changing times. This is actually Talent. Talent is the ability to learn new things. Skills get outdated fast in this fast changing landscape while talent is something which stays with one forever.

Bonus – how to kick off an interview

So you got a rockstar engineer to come in and have a chat with you.. what next?

  • Interviewing is a 2 way street. You are interviewing the candidate and the candidate is interviewing you. This especially applies for rockstar engineers. Don’t forget this and try to make their experience as pleasurable (and memorable) as possible.
  • Start the process by asking the candidate “What is your most proudest moment in your professional career”. This gets the candidate talking and you can listen, gauge and ask specific questions to drill down into topics that might not have made to their resume.
  • Draw a mindmap as the candidate talks about their proudest moment. This is there to help you understand, navigate and ask better questions. Also shows to the candidate you are paying attention. Remember, your interviewing a rockstar engineering.

More on hiring

If you found this post useful and are now thirsty for more hiring hacks, check out my extensive list of posts (notes) from events I attended where the likes of Auren Hoffman (Rapleaf), Russell Fradin (Dynamic Signal), Dan Arkind (JobScore) etc… shared their experiences.

Have questions? use the comments section below or contact me.

Are you a rockstar engineer?

Then I want to speak to you. We are hiring for many exciting positions at coupons.com.

Coupons.com is located in Silicon Valley (California) and is the leading provider of consumer-printed coupon marketing and technology solutions leading the shift from print based couponing to Internet delivery, a $6.6 billion per year industry. Coupons.com recently got valued at $1 billion company. Contact me to find out more.

~ Ernest