Startup Equity Compensation in the DevOps/SRE Market

The DevOps/SRE space is consistently a highly competitive marketplace. The unprecedented shift in the way we work, communicate and consume emphasized the discipline’s critical impact on business success. Rather than slowing down, the demand for DevOps and SRE professionals spiked during the pandemic, further establishing the market’s candidate-driven status. Moreover, as the pandemic increased the need for security and reliability, DevOps and Site Reliability engineers were at the forefront of the massive digital transformation. Amid the global crisis, DevOps remained one of the fastest-growing roles across industries.  

Even in times of crisis, DevOps hiring maintained steady growth. With the demand for DevOps/SRE professionals progressing, fast-evolving skills, and highly competitive salaries, companies of all maturity levels are struggling to attract the best candidates.

While high average salaries are persistent in the DevOps/SRE sector, we noticed several new trends in hiring, such as the normalization of remote work options and a promising focus on diversity. But as more companies compete for top talent, attracting and retaining skilled engineers often goes beyond salary and employee benefits. It is common for tech startups to offer equity as part of their total compensation. Compared to giant tech enterprises, startups typically give employee ownership in the company to keep pace with the market’s earning potential. However, in doing so, startups ensure that the people driving the company’s growth also benefit from its success, adding to the culture of shared responsibility and meaningful work.

Startup equity compensation packages are designed to attract top engineers. But, while owning part of an exciting new company may seem like you’ve hit the jackpot, there are a few key things to consider before accepting an offer or choosing between competing offers.

Equity indicates the value of an ownership stake in a company. Your stake in the company turns to gain when purchased or listed on the stock market (IPO). Restricted stock units and stock options are two of the most common forms of equity that companies can use as part of their compensation offer to incentivize and reward employees. In this article, we focus on the main differences between the two forms of equity and share our expert insights on what to look for when evaluating equity compensation options.

What is a Stock Option?

Stock options give an engineer the right to buy stocks at a set price (or strike price), deemed fair market value. The expectation is that the company will grow in time, thus increasing the value of the stocks. Generally, companies provide the option to buy the stock at a discount. 

Stock options come with a vesting schedule that requires you to work at the company for a certain amount of time before exercising your options. The most common vesting schedule is four-year vesting with a one-year cliff. The vesting schedule typically begins on the grant date. For example, if an engineer receives 10,000 stock options, the first 25% vest at the end of the first year, with the remaining 75% being apportioned 25% at a time annually throughout the following three years. 

However, the stocks’ market value may remain inferior to the strike price, in which case exercising your options would result in loss. Plus, as a company grows, stock options become less effective than restricted stock units.

What is a Restricted Stock Unit?

Restricted stock units, or RSUs, are typically offered by companies past the startup stage. As opposed to stock options that you buy, RSUs are granted by the company with restrictions, most commonly a vesting period; this may take place after an amount of time or the achievement of a specific individual or company goal, as an exit plan.

After the vesting period, RSUs are distributed as shares of the company’s stock. While stock options may expire worthless if the stock market price remains below the strike price, RSUs always hold some value. Indeed, RSUs provide more stability and security against market volatility. Still, stock options are generally preferred because of the potential tax advantages. The tax treatment of the different equity forms is complex, and we advise engineers to consult their recruiter or a tech-focused attorney.

How to evaluate the value of a startup equity compensation offer

The lure of equity compensation packages has engineers saying “Yes” before they take the time to understand the offer.

Is it enough to compare opportunities based solely on the major differences between equity and RSUs? Most engineers we accompany in their careers overlook a few essential aspects when it comes to equity package deals. For example, when a candidate receives an offer from a startup or a high-profile company, we first advise them to check who the investors are that back the company. Venture capitalists (VCs) provide capital to companies that demonstrate high growth potential in exchange for an equity stake. In the case of startups, they take on a great risk banking on these early-stage companies’ eventual success. 

Look at what other companies the VCs are backing, and ask questions like: Are they big names? Have they been successful? 

Once you have this covered, turn your attention to the board members. Do a quick research on their background. Who are they? What are their most memorable career achievements? Have they distinguished themselves in any particular way? As with the investors, knowing who the board members are is a good indicator of the startup’s potential and, therefore, of your equity compensation’s value. Having big names take an interest in the organization you consider joining is a positive indicator of the company’s potential for future success.

Equally important, do a background check on the company’s founders. Have they founded other thriving companies? What is their long-term business goal? 

While having visionary founders, leading board members, and influential investors involved in the business may be a good indicator of the company’s worth, checking out the engineers who joined the company is just as important. Any outstanding DevOps/SRE engineers in the bunch? Maybe someone you look up to or met at a conference? What does their professional background look like? Great companies attract top experts and have an eye for spotting burgeoning talent.

Last but not least, we highly recommend looking at the product the company sells. Albeit all the exceptional human resources involved in the company, it is ultimately the product that will determine its future success. Analyze if there is a market for the product or whether the timing is right for its release.

As DevOps continues to push forward innovation and reshape the business environment, hiring the greatest DevOps/SRE minds becomes essential. Yet, while high-profile tech enterprises lure top talent with big salaries and benefits, startups typically bank on equity compensation to win the talent race.

Although an industry-standard, startup equity compensation is often misunderstood. Evaluating the potential worth of different types of equity can be very challenging. So, before choosing between competing offers, we advise engineers to look beyond the compensation package itself and consider the players behind the company. The more high-profile people involved in the company, the higher the chances of a startup reaching success.