In this issue, we’re returning to the black art of pricing strategy. No, I don’t haven’t great advice for you about how to set the right price for your startup’s product. However, in this issue’s first article, I share some thoughts on how to set the wrong price, which was something I did… a lot…
After that, I share some thoughts about how to build the “next Amazon.” It’d be easier to do than you think (so long as you think it would be impossible).
Finally, I end the issue with some thoughts on a reader’s question about whether she should accept more equity or more salary. The obvious answer (at least to me) is to take more salary. But do you know why? Read on to find out…
I Scared Away Customers By Making My Product Too Cheap
Every entrepreneur worries about over-charging for their products. Should you also worry about under-charging?
How to Build the “Next Amazon” in 3 Simple Steps
Someone asked me to give a guest lecture to explain what it would take to "build the next Amazon." At first, I thought it was a ridiculous request. But, the more I thought about it, the more I realized it wouldn't actually be that hard. At least... not hard in theory. Here's the advice I gave.
Office Hours Q&A
I’ve been offered a job at a startup, and I have the choice of taking more equity and a lower salary, or less equity and a higher salary.
Which would you choose, and why?
Thanks for your thoughts,
To answer your questions directly – what would I choose and why – I would absolutely choose salary over equity.
Equity is a gamble on the future, whereas salary is money in-hand immediately. Yes, there’s a chance the equity could be worth significantly more than the salary, but the chances are slim at best. As the old saying goes, I’d prefer a bird in the hand to two in the bush.
Also, for what it’s worth, keep in mind that additional salary aggregates over time, and your equity will have to vest over time anyway. Let’s use the standard term of four years. If, for example, the higher salary is an extra $2,000 per month, that would be nearly $100,000 over four years. How certain are you that your equity will be worth significantly more than your aggregated additional salary over time?
Mind you, choosing a higher salary is my preference. You need to decide what makes the most sense for you and your situation. The best way to decide is to consider your personal circumstances and risk tolerance. If you have other reliable sources of income and/or savings, or if the salary at a higher equity still gives you plenty of money to live on (and save for later), then choosing the option with higher upside might be better.
You also have to consider the potential of the startup you’re joining. Think about everything from its current traction to its founding team to the amount of capital it’s raised. Those details should all factor into your decision about where the startup is heading and the likelihood of equity becoming legitimately valuable.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!
Two additional considerations:
The incentive stock options (equity) should be designed to get you to go all out to make the company worth a lot more in 4 years than the additional salary would be. If you think you can make it happen, then equity might be the better play as long as you can get by on the lower salary.
BUT (and this is big), If you are a US taxpayer, you will lose any unvested option shares if you leave the company and must purchase any vested shares within 90 days of leaving the company, or you will lose those too. As much as half the value of vested option shares is lost every year because of this trap. (It's a wrinkle in the Internal Revenue Code.) There are now option purchase finance companies that help mitigate this problem, but you should factor this into your decision.