What $1 Million Won’t Buy You

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Gillmor Gang LIVE 09.26.14

What’s the value of talent today in Silicon Valley? This year, a startup with revenues of $10 million wanted to find a new chief executive following its Series B raise and offered $450,000 in compensation (5% of revenues). Another startup, quickly growing and approaching an IPO, did a search for a CEO to lead it onto the public markets. In addition to a hefty compensation package, the board of the company is willing to put up a signing bonus of $1 million, to be delivered in two tranches over a year, for a vetted candidate willing to step up and sign the paperwork.

Their offer is turned down.

These are just some of the battle stories relayed to me from Brad Stadler, founder and managing director of True, a data-driven executive search firm. “We haven’t seen anything like this since 1999,” he told me, noting that signing bonuses for execs like the one at the pre-IPO startup have traditionally been rare, but are starting to make a fast comeback. Stadler should know, since he began recruiting in 1999 just as the dot-com bubble was approaching its peak.

Last week, Bill Gurley’s comments on the high burn rates of startups sparked a voluminous output of stories discussing the high valuations of startups, and the risk these startups face if the investment market changes tune. Over the past few months, venture capital dollars have flowed into the system, increasing valuations and fundraises, giving startups more resources than ever before to spend in their pursuit of growth.

As money has been pumped into the ecosystem, salaries for senior executives have been rising dramatically. True, which shared some of its aggregated compensation data with TechCrunch, found that in the time period between 2013 and July 2014, salaries for CEOs increased by 11%, with chief financial officers and VP of Sales receiving a 14% and 13% increase in compensation respectively. Notably, the salaries of VPs of Engineering have been flat over the same period.

These changes are fundamental, and are upending our notions of how to define a startup and what risk to associate with starting a new venture. No longer are founders and executives toiling away in a garage or a bland office park with minimal pay, hoping to one day build that product that turns them into a legend. Now, they are at the center of one of the most competitive labor markets the world has ever seen – and they are demanding their share of the pie.

Ultimately, these salaries are a function of labor markets, where an increasing number of well-funded startups fight for a relatively static group of experienced executives. As demand increases for their talents, these executives are increasingly demanding compensation that matches the levels of public companies.

These higher salaries are changing the types of executives interested in startups. As venture capitalists have been willing to entertain higher salaries in the pursuit of growth, startups are able to target new markets to attract talent. Today, startups can poach talent from large technology firms that may have been out of reach in the past, since the gap between compensation at startups and large technology companies like Microsoft and Google has become small to non-existent.

The bifurcated labor market that used to exist in technology has now been blurred, as workers comfortably switch from large to small companies throughout their careers. That has positive effects for both, with startups benefiting from the experience of large corporations, and large companies gaining the spontaneity and creativity of entrepreneurial workers.

Even more notably, startups can now draw talent from across the country to startups, even among risk-averse executives outside of the technology industry who would never otherwise consider startups as a viable career path. Take Harvard Business School graduates, who are among the most talented future managers out on the market today. Since 2006, the rate of graduates heading to technology companies has hovered near 7%. In 2013, that number jumped to 18%, and it doesn’t look like the rate will decrease any time soon.

Even those who have already made other career plans are being drawn by the lucrative contracts available from top startups. Wall Street, once a haven for avaricious bankers, has seen a significant exodus of talent to San Francisco and other technology hubs. That same exodus has also been seen from Washington DC, where senior politicos have been heading to Silicon Valley, such as Obama presidential campaign head David Plouffe, who recently joined Uber to lead its policy and strategy team.

The increasing competition for talent also has a trickle-down effect for the next generation of executives moving up the ranks. Stadler from True notes that “It used to be very consistent that CEOs and Boards wanted people who had done it before. But because the market is so competitive with those sorts of people, and the likelihood of landing that person is so small, now we are really hearing that people want to go after the up-and-comer types that have tremendous potential.”

Given technology’s central role in public and private life today, the ability to attract the best has arguably never been more important. Given Silicon Valley’s penchant for meritocracy, we should be applauding the fact that the region has been able to attract such high-caliber individuals.

But risk is a sword that cuts two ways. While it can deter many great candidates from working at startups, it can also filter candidates passionate about a product from those merely moving to where the money is today. And risk also acts as a disciplining function, ensuring that capital and labor are being deployed in the absolutely most efficient way possible.

The question on the minds of many I talk to remains whether the new values that are being imported into the region are going to be sustainable. It appears that glamour and greed are increasingly supplanting the product and technology-focused work that engineers in the region have been doing for decades. In short, does Silicon Valley have a culture that needs to be protected, or is this evolution completely positive?

Take Silicon Valley’s traditional missionary view of the role of the founder. We have traditionally mythologized founders, and for good reason – starting a company used to be extremely difficult, and the daily fight for growth was something that only a rare individual could sustain all the way to an exit.

Today, though, starting a company couldn’t be easier, and it is getting cheaper all the time as well. Google recently announced that it is offering $100,000 in credits for its cloud-based services, cutting one of the few remaining costs for new startups. And as venture capital investments have spiked, the risk of not receiving funding at all has gone down as well.

As the early risks have faded, there has been increasing tension between founders and their employees over issues like equity and recognition. Startup employees have greater opportunity costs today, and it can be harder and harder to find great candidates willing to grow a startup rather than to strike it out on their own. As one engineering friend of mine told me this week, their startup has been fighting hard for every single hire – and still repeatedly losing despite a great product and excellent funding.

The other major change is around inequality. One of the major historical influences on the region has been the counterculture movement, which among many aspects, emphasized equality as a bedrock principle of society. But the heightened salaries of executives at companies shines a glaring spotlight at the growing inequality of employment in the region.

At a time when executive compensation is rapidly growing, the engineers and product managers on the ground faced collusion to hold down their wages from some of the region’s most iconic technology companies. And in San Francisco and the Bay Area more generally, the inequality levels have risen so high, that Silicon Valley cannot be distinguished from the inequality in some sub-Saharan African countries, at least by some measures.

It has been fashionable to talk about the battle for the soul of San Francisco, between the artists and creatives on one side and the techies at startups on another. But there is a similar battle looming here as well, between a Silicon Valley of fame, fortune, and $1 million signing bonuses, and a region that loves technology, products, and hacking in and of themselves (with perhaps fame and fortune occasionally showing up). Call it bankers versus artisans, but ultimately, it is our love of creation that has driven our success – not venture capital dollars. We should make sure it stays that way.

Cropped Image by Nick Ares used under a Creative Commons 2.0 license.