Plan Your Finances Before Joining a Startup

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Joining a startup offers exciting opportunities to work with innovative people and new technologies – plus take on more responsibility and possibly move up the career ladder more quickly. But it can also mean long hours, lower pay and the possibility of being out of a job in six to 12 months.

So is that job offer a good deal? We spoke with two certified financial planners — Stacy Gallagher Ployhar of 2020 Financial Planning in Seattle and Charlotte, N.C.-based William Bissett of Pinnacle Advisory — about things to consider.

Click here to find a job at a startup.

Can You Live on the Salary?

Where you are in life will determine your requirements, Ployhar says. A person who’s married with children and owns a home will have very different needs from someone in their twenties whose only concern is paying off their college debt.

“Everybody needs to be able to live below their means,” she observes. “The higher their lifestyle costs, the more limited they’re going to be in the offers they can accept, especially at a startup, because that salary likely would not be as much as it would be at an established IT company.

“They have to recognize what tradeoff they’ll have to make – if they make one at all,” she continues. “But people who work for startups tend to be more interested in getting in on the ground floor of something really exciting rather than the salary.”

While startup salaries have been reported to be about 70 percent of what larger companies pay, not all startups are cash-strapped. So do your homework and negotiate for a reasonable blend of salary and equity. (Side note: Buffer, a company that enables clients to schedule posts for social media sites, recently made all its staff salaries public in a bid for “radical transparency.”)

What About Equity?

It’s important to fully understand the various equity options and what they mean for you as the company grows – or doesn’t. A recent study found that up to 75 percent of venture-backed startups fail. While a few go public – and then share the wealth — it’s more likely they’ll be bought out by a larger company. What happens to your shares then?

Remember, Ployhar points out, employees and partners operate in “very different spheres.” The pre-IPO stock that employees are granted tends to have no hard valuation or maturation put on it, she says. If the company is sold to another firm, you might see something, or you might not. Buyout deals tend to favor the partners; the employees, not so much.

What About Benefits?

Very small companies in particular may not offer traditional benefits like health, life and disability insurance. That means you’d have to purchase those at your own expense. “We never know what’s going to happen. Those three types of insurance are something you need to take under consideration if your company isn’t going to provide them,” says Bissett. “Your situation will determine what you need.” One thought: create a spreadsheet that compares your current salary and benefits to those the startup is offering.

Remember that smaller companies now have the option of sending their workers to health insurance marketplaces like or state-run exchanges to buy their coverage.

Do You have a Cash Reserve?

“If you don’t have stability in income, then you need to have stability in savings,” says Bissett. “You have to look at whether you can sustain yourself while building up a safety margin in case this company doesn’t survive.” Generally, that means you should have handy three months of expenses or six months of salary,” he says.

“If you don’t know when the next opportunity will come or what that opportunity might be, those in the startup community would want to have more of a cash reserve than someone working in the typical Fortune 500-type job,” he adds.

Startups may or may not offer a 401k retirement plan. “That’s actually probably a good thing,” Bissett believes, since it can be tempting to use those plans as a cash reserve. Though companies often offer matching contributions – and you leave money on the table if you don’t participate – they carry penalties for withdrawals if you’re younger than 59½.

People join startups because of the opportunities they offer, but remember the odds of success are often against you. As the old saying goes, “Plan for the worst, but hope for the best.” That way things will be easier if things don’t work out the way you’d hoped.

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