Key point to take away from this is: Wages constitute the majority of the increase in startup expenses. Real estate costs add only 5% of per employee costs.
The market has driven up salaries ridiculously high.
It's all driven by real estate: residential, not commercial. Salaries are higher because people need to spend so much of their income on housing, and living in a high-cost area like San Francisco requires a higher income level.
That's one way of looking at it. The other way of looking at it is that the tech sector is one of the most profitable sectors in the US economy that rakes in millions per developer. The salaries are high because they should be: the companies are raking in record profits, why shouldn't the employees see some action?
If that was true, salaries would be high everywhere. They're high in SF because of competition for workers, and because of the high cost of living.
Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
Not to mention that, now that decent 1 bedrooms in commute friendly areas of the city cost $3500, the first $70k [1] of salary is a straight passthrough to the landlord.
Please clarify your assertion. Are you saying real estate price increases have contributed 5% of employee costs, or (and this is what everyone else so far reacting to your assertion is interpreting) are you saying residential real estate is 5% of employee compensation costs? Increases in SF and SV area alone over the past 10 years, I can easily buy the 5% figure; could be even smaller. But see my comment further below on the where the bar is for companies to make major changes to capture small payroll savings.
If you are describing an increase as a contributory factor, then you are obviously missing the time period that goes along with that increase you are talking about, so readers can go and look up the historical real estate pricing data.
At 6-figure high-competency-developer total compensation package (and salary) levels in the US, you are looking at the 28% marginal tax bracket for the employee. High-wage employees like these developers will typically pencil out to 100-150% fully burdened to the company. For top 20 metro areas in the US, you will tend to see most such employees spend closer to 45-50% of gross pre-tax income on shelter costs (counting PITI plus maintenance), rather than the 33% that is the historical prudent personal financial planning guideline (and those guidelines should be taken with a grain of salt for reasons I won't get into here).
With my CFO hat on, I look at the ratio of third-highest decile (with 50% pinned to the median) of PITI plus maintenance in the parts of the city I anticipate most such employees would prefer to live, to the total burdened cost per developer, to establish just how much the company is paying for shelter costs of its employees. It's a surprisingly large percentage for the top 10 metro areas, though everyone's specific numbers will be different based upon neighborhoods they choose, time period, etc. The ratio of course goes up as you travel down the skill (and payroll cost) ladder.
Even with highly-compensated and -skilled employees towards the higher end of the skill ladder, I was coming up with ratios closer to 10% than 5%. I've seen companies move mountains to capture far, far smaller payroll savings percentages.
What is much more difficult to quantify however, are the soft benefits of ready access to the large, concentrated ecosystem that grew up around the industry in that geographic area. Clearly, many companies today consider those soft benefits worth the incurred hard total compensation package costs. It's a calculation that you and your advisors should make and continually revisit once in awhile for your venture's own individual circumstances.
For some smaller outfits who already have an assembled team and are in their early development stage, it is arguable that those soft benefits do not outweigh the immediate cash flow benefits of avoiding the high cost of living areas.
The former. The article indicates that while costs of office space have increased (doubled in rate really), when compared to the increase in costs from employee salaries, it's minuscule in comparison.
Thus, the vast majority of the increase in costs that it takes to run a startup is in employee salaries, rather than office space.
sheepmullet|11 years ago
Has it really? My dad owned his first home freehold after working for 5 years. I'm almost there after ~15 years. And I've had help from my wife.
Real estate has driven up salaries ridiculously high.
franklinho|11 years ago
walshemj|11 years ago
applecore|11 years ago
littletimmy|11 years ago
peteretep|11 years ago
Here's an open secret: companies willing to allow remote working are able to hire in a -fraction- of the time it takes to hire onsite, and often substantially cheaper.
x0x0|11 years ago
[1] at a 40% tax rate, 3.5k/0.6 * 12 = 70k
Iftheshoefits|11 years ago
Wages aren't ridiculously high in SV--they're ridiculously low, just like share of equity is.
yourapostasy|11 years ago
If you are describing an increase as a contributory factor, then you are obviously missing the time period that goes along with that increase you are talking about, so readers can go and look up the historical real estate pricing data.
At 6-figure high-competency-developer total compensation package (and salary) levels in the US, you are looking at the 28% marginal tax bracket for the employee. High-wage employees like these developers will typically pencil out to 100-150% fully burdened to the company. For top 20 metro areas in the US, you will tend to see most such employees spend closer to 45-50% of gross pre-tax income on shelter costs (counting PITI plus maintenance), rather than the 33% that is the historical prudent personal financial planning guideline (and those guidelines should be taken with a grain of salt for reasons I won't get into here).
With my CFO hat on, I look at the ratio of third-highest decile (with 50% pinned to the median) of PITI plus maintenance in the parts of the city I anticipate most such employees would prefer to live, to the total burdened cost per developer, to establish just how much the company is paying for shelter costs of its employees. It's a surprisingly large percentage for the top 10 metro areas, though everyone's specific numbers will be different based upon neighborhoods they choose, time period, etc. The ratio of course goes up as you travel down the skill (and payroll cost) ladder.
Even with highly-compensated and -skilled employees towards the higher end of the skill ladder, I was coming up with ratios closer to 10% than 5%. I've seen companies move mountains to capture far, far smaller payroll savings percentages.
What is much more difficult to quantify however, are the soft benefits of ready access to the large, concentrated ecosystem that grew up around the industry in that geographic area. Clearly, many companies today consider those soft benefits worth the incurred hard total compensation package costs. It's a calculation that you and your advisors should make and continually revisit once in awhile for your venture's own individual circumstances.
For some smaller outfits who already have an assembled team and are in their early development stage, it is arguable that those soft benefits do not outweigh the immediate cash flow benefits of avoiding the high cost of living areas.
franklinho|11 years ago
Thus, the vast majority of the increase in costs that it takes to run a startup is in employee salaries, rather than office space.
_random_|11 years ago