Why is startup compensation so mysterious?

Photo via iStockPhotoIf you are an entrepreneur, then it is fairly easy for you to use a general rule of thumb to come up with the valuation you are likely to get for your startup — depending on the stage of the company (seed, series A and later stages) and the scale of success or the merit of your idea. And that is possible, thanks to numerous blog posts, tattling tongues and other new sources of information.

However when it comes to hiring employees at the early stages of a company, no one really has a clue about how they should be compensated — cash, equity or what combination of both? Why is that? Because a lot of the salary and equity-related data is never really shared by startups, argues Naval Ravikant, co-founder of startup funding market place, AngelList.
The market, he points out is very opaque and as a result you don’t have much consistency in terms of who gets paid how much and more importantly how much equity an early stage employee gets.

AngelList wants to offer up aggregate data to its startups and create more transparency. Angel List offers job listings for its member companies (most of them at early or very early stages of their development cycle) and asks them to list the salary and equity they are going to offer for specific jobs.

Ravikant looked at listings across 60 startups and plotted the salary and equity data on a chart and as you can see it is all over the map. From the data, I saw companies that are offering hefty packages — cash and equity — and others that are being stingy. The compensation for the much in demand iOS developers is worse than the EKG chart of a cardiac patient.

Apart from the opaque market, Ravikant believes that Google and Facebook are paying top dollar for engineering talent and as a result, salaries are all over the map. Startups, today, have to compete not only on salary but also on equity. The problem is only going to get worse as 2012 progresses. As I wrote earlier, the Facebook IPO could act like a spark for further startup creation activity which in turn would overheat the job market.