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September 25, 2018

Silicon Valley Startups Pay More For Skilled Workers Than Mature Companies

Written by and shared with permission of: Mighty Capital Partner, Jennifer Azapian

This is one of the biggest reasons startups must raise another round of funding sooner than expected.

Who pays higher salaries for data scientists — Google or emerging startups in Silicon Valley? You might think it’s a silly question, but if you answered Google, you’d be wrong. For founders, skilled worker base compensation is no longer a cost cutting haven. In many instances, newer companies must match or beat the larger firms. And for entry level data scientists, the difference early stage companies are willing to pay might be as high as 20 percent. What’s causing this shift?

The Good Old Days

Five to seven years ago, early-stage companies could afford to pay much lower salaries for developers. Back then, the discount was easily 20-40%. Today’s market, however, has shifted dramatically, and this profoundly impacts new companies seeking funding.

New Reality

At Mighty Capital, we’re seeing software developer salaries at early stages nearly equal to mature companies. This is a huge change. For data scientists, the numbers are even more striking with a 5-20% discount in favor of the mature company.

Market Forces

Some of the main drivers behind the new salary distribution landscape in Silicon Valley are:

  • Tight employment pool – Lots of work but few skilled workers.
  • High cost of living in Silicon Valley and other tech epicenters.
  • Robust VC market – Plenty of capital and investors seeking opportunities to spend it.
  • Over-reliance on narrow talent set (graduates from Stanford, Cal, CalTech, MIT, etc.) Hint: there’s plenty of great talent out there that didn’t go to your school.

Culture of Transparency

Besides the market forces described above, cultural shifts also influence pay rates. It’s much easier to find out what people make these days. Sites like Payscale.com, Salary.com and Glassdoor.com have increased salary transparency, and people chat and blog about it. These portals provide detailed information including dollar amounts by level of experience, region and company.

In the past, only employers could purchase verified salary data, and they kept that info close to the chest. Now, decent salary information is available and discussed online. This shifts the balance of power, and salary negotiations take on a whole new character.

High Turnover

It’s also no secret that job turnover in the tech sector is high. The average tech worker might change jobs every one to two years. And they usually move because they get paid better which drives salaries higher.  In addition to that, we even see Silicon Valley workers creating an early-stage stock “portfolio” in promising companies by exercising some options when leaving each company before the standard 4-year vesting period.

Restricted Stock Unit

The Restricted Stock Unit (RSU) equity compensation vehicle has also made a big impact in the salary wars. RSU’s are generally used only in publicly traded and very late-stage private companies. It tips the scales in favor of mature companies when it comes to total compensation value, while keeping control of base compensation expense.

The RSU is a grant in cash or stock that represents equity value in terms of a specific dollar amount. An RSU grant of $20,000, that vests over four years, is a full-value grant upon vesting. Stock options, meanwhile, have an unknown future value that fluctuates versus the strike price on date of grant, and may eventually have no value for the employee during down rounds or other events that might cause the price to drop below the strike price. With RSUs, it’s all upside since there is always some value that can go up with the stock price. Also, the RSU is an excellent employee retention tool since it’s typically granted annually.  

In the past, startups had the upper hand in employee wealth creation thanks to broad-based equity offerings with potentially enormous payoffs. Now, public companies commonly offer a cash compensation package, bonuses, and new hire options in addition to RSUs. In 2003, only about 3 percent of mature tech companies offered RSUs. Recent data shows that number has ballooned to at least 73 percent.

Founders Take Note

Early stage companies can’t offer RSUs on top of other compensation since they don’t have the valuation, the cash, or the guarantee that they’ll be around in four years. Given these headwinds, the only option for emerging companies to compete is to beef up salary offerings. And this is precisely what we’re seeing.

Now, more than ever, founders must convince talent that their brand is a great opportunity. Or even better, make sure it is a great opportunity. Plus, from the get-go, startups hiring in high-demand labor markets should plan to absorb higher salaries when seeking early funding.

Author Bio:

 Jennifer AzapianJennifer Azapian is a Partner at Mighty Capital and works actively to source, assess, and invest in deals and to support portfolio companies with their HR strategies.  Since starting her career scaling Virgin America from 10 to over 2200 employees, she has spent the last 15 years working with growing businesses, their leaders, and investors as an executive coach and advisor on issues such as compensation, organizational design, headcount and performance strategic planning — all with an eye to helping companies prepare for smooth, rapid scale or for an exit.  Jennifer holds a BA from Dartmouth College, an MBA from INSEAD, and Compensation Committee Certification from the Economic Research Institute.

 

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