Startup Employee Compensation

I saw this tweet yesterday, from Gokul Rajaram, who is a board member at several prominent tech companies.

CEO told me their company is getting kudos from investors for having a super frugal office setup.

Founders: While creditable, this should be the expectation, not the exception. In fact, before you generate $1 of free cash flow, you should avoid ANY extraneous spend. T&E fly…

— Gokul Rajaram (@gokulr) March 17, 2024

The tweet seems correct, as far as it goes, but it’s worth noting that startups have to compensate employees somehow. It’s interesting to pair the attitude in this tweet with the common refrain that hiring great tech talent is incredibly hard.

Surely to some extent the answer is to compensate employees with equity, although startup equity has some complications:

• It’s usually illiquid
• Stock options require employees to eventually put forward cash to exercise; if the employees are working largely for equity, raising the cash to exercise becomes hard
• Equity compensation turns employees into investors in the company; this has a lot of benefits but also turns the stereotypical employer-employee relationship on its head – employees are now in a position to ask the same hard questions of executive leadership that investors ask

The liquidity issue is typically the largest – you can’t pay the rent or the mortgage or the groceries or the childcare provider with stock.

So we get back to cash compensation.

Of course, the tweet frames its recommendations in terms of extraneous spend. Is a nice office or a bonus extraneous?

I think you could argue about a plush office, although note that a luxurious work environment has value to employees. Maybe just taking that money and giving it to employees as cash would be better, but I guess a nice office is possibly more psychologically and tax advantageous than cash.

And I guess a bonus could be extraneous if it were totally unexpected. But a lot of companies build bonuses into their published compensation structure and employees factor this as a core part of their compensation.

I have other thoughts about bonuses as a part of compensation. There are some significant plus and minuses, from all points of view – deciding whether to take part of cash compensation and put it into a bonus form is non-trivial.

But in the context of the tweet – sure, companies should avoid extraneous spend. They should probably avoid extraneous spend even after they become cash-flow positive! Extraneous spend is wasteful, by definition.

But companies also need to compensate employees in order to attract and retain them. Employee compensation is not extraneous! Let’s not be penny-wise pound-foolish here.