The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question, “How do you negotiate a raise at a startup?" is written by Stav Vaisman, co-founder and CEO of OurPlan.
The common mindset when asking for a raise is to consider one’s personal and financial self-interest. This self-serving approach is understandable. You believe you’re undervalued, and you’re only asking for what you believe is fair, given your contributions to your employer’s bottom line. Your boss is making more money off of you, so why shouldn’t you be compensated accordingly?
This question illustrates the unique considerations that must be made when asking for a raise in a startup. In many cases, a startup lacks a bottom line where net income is reported.
When an employee is first hired at a startup, he costs more money than he’s generating for the company. Indeed, this is why so many startups chintz on salaries and supplement compensation with the promise of options. Your value has yet to be recovered on the balance sheet. This stark reality of the startup’s financial condition demands a new set of factors to consider when asking for a raise. Familiarize yourself with two metaphors: the runway and the burn rate.
Make sure your firm can achieve lift-off
The length of your startup’s runway is the first factor to consider when asking your startup boss for a raise. This metaphor relates to the amount of time your startup has to start making money before it crashes and burns. The length of the runway, as the metaphor suggests, presents the opportunities for taking flight or succumbing to a devastating crash.
Liquidity is like the wind beneath the wings of your startup. Your firm uses cash to invest in everything necessary to take flight. When you ask for a raise, you are literally sucking the wind out from your startup’s effort to achieve lift-off before the runway plummets into oblivion.
What’s the takeaway? You must make sacrifices before you earn your reward. Make sure your request for a raise doesn’t set a roadblock in your firm’s runway. If it does, your request will be denied. More importantly, your boss will question your commitment to the cause. Wait for a time when you know your runway stretches long and wide into the horizon.
If the runway looks long, provide proof that your raise will actually extend the runway. If the headhunters have been calling, and your raise is vital to keeping you from taking a better offer elsewhere, be transparent with your boss. Tell him or her that you cannot wait for the afterlife to be compensated somewhere closer to market (i.e., that blessed time when your startup begins earning rather than burning). If you’re accurately interpreting your value to the firm, your continued presence will be considered an investment rather than an expense.
Feel the burn
The burn rate refers to the pace at which your firm is spending its cash (and keep in mind that this liquidity usually comes from investors rather than sales revenue). As this metaphor suggests, there is a close association between the burn rate and the runway. Imagine your firm to be an airplane running a gauntlet of fire on a runway. Too much fire means you’ll never achieve lift-off. You want a slow burn, not a conflagration. Your request for a raise is like throwing gasoline on the fire.
What’s the lesson? Avoid making a request that increases the burn rate at your firm. Your boss is already trying to manage what can seem like cash inferno. If your raise is truly warranted, you must show your boss how it protects the firm against burnout.
In sum, consider the reality that your work has yet to be realized in liquidity, so any request you make for extra compensation means your boss has that much less to apply elsewhere. Most likely, you came to the startup for the potential returns that have yet to be realized in salary compensation. Don’t ask for additional cash compensation when your startup is nearing the end of the runway and is burning through its cash at an excessive rate. If you believe you must be additionally compensated, consider asking for more options or other types of compensation that won’t require immediate expenses.
Best of all, consider yourself more like an investor and less like an employee. Your labor is your capital. Invest it wisely, and you might receive long-term returns.