How much should you pay an intern in a start-up?

Recently, a lunch treat with a couple of friends brought up an interesting discussion on how much we should pay interns in a start-up. Given the dearth of talent in Singapore as many claimed, one solution is to look for inexperienced and passionate people, and they usually come from the tertiary institutions (universities and polytechnics). The aim of this article is to establish some principles in setting up a reasonable pay scheme for interns in a start-up.

Here’s the story. A few start-ups took part in an internship program and offer positions to various candidates. Each one arbitrarily decided the salary which they would pay an intern. Let’s put a few numbers up first before we continue on. The pay ranged from S$700 to S$1.2K per month and no company actually spoke with each other on how much they were paying.

The average worked out to be about S$900-S$950, based on the range offered by the start-ups. The minimum market rate pay for a polytechnic internship is advised to be about S$400 a month and university undergraduate at about S$550. Just to compare, an investment bank internship (which is possibly the highest-paying one) would cost about S$1.6K per month.

All these benchmarks do help us get a sense of what the right pay is. Of course, in a year’s time, thanks to inflation coupled with demand and supply, the numbers will change. But you can use a discount rate using the time value of money to work out the numbers then.

The best and the brightest who are going for a career in banking, consultancy or a job in any major corporation will never work for a start-up. That’s a very competitive area. So you’ll probably have to rule out that group of people. Because an internship in a bank is so lucrative, a lot of students will apply.

So, if a student comes to you and tells you that he or she plans to work for an investment bank or consultancy firm, you should probably rule this student out from your start-up. It’s nothing personal, but the student will never fit the mold in a start-up. If you drop into the second tier, you are probably going for those who could not get into the banks and just take anything that comes along. The same principle applies and you should not hire them.

So, where do you go from here?

In the end, you are only left with three types of students which will come to the start-up. The first group is self-selected: They are going to start a business later when they graduate and are totally motivated in what they do. I don’t have the whole dataset but when I first surveyed students who I have taught in different universities, most of them either have one parent or relative who are business owners themselves (not necessarily successful). This group has a lower resistance towards risk taking.

The second group consists of people who want to learn but they are not the type who will end up working for a bank because they either don’t have the grades, or sometimes, connections to get their internships.

The third group are just people who figured out that they want to join a bank later in their lives, but want to experience what it’s like to be in a start-up. All three groups have their own risks and benefits.

With the above in mind, here are two methods to determine a pay structure for an intern in a start-up.

1. Apply the principle of consistency on how you pay employees and interns in a start-up.

That’s the principle I have used. When an employee joins a start-up, they don’t get a lot of benefits such as healthcare or perks. Any employee will think in an one year horizon, but their actual period of survival for employment is 9 months. The reason why Silicon Valley can attract a lot of people to start-ups is because of the equity or stock options vested.