[yourapostasy]

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.

[franklinho]

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.

[yourapostasy]

It isn't cost of office space people are pointing out though, but cost of residential space. At least 30%, and more commonly 50% in SV/SF, of your company's salary compensation goes out to residential shelter payments. That's the low-hanging fruit to address if you want to reduce employee salaries.

Especially for a startup in like a stealth stage where the initial talent pool is already selected, and you don't really need all the touted soft benefits of the SV talent ecosystem when you are head-down in secretive development, it's advantageous to stay out of the high living expense metro areas. Living in flyover country during that period with the fully-communicated intent to the team that you will move to SV/high-COL-metro-area once you reach a specific level of financial success with specific commensurate salary adjustments for them, yields 15%+ salary cost savings from residential shelter cost differentials alone (plus other cost of living adjustments on top of that), and lets your initial employees plan ahead life events.

Now that startups are increasingly tapping the Millenial generation cohort for their talent, who statistically are already more indebted at their stage of life than previous generations, starting up in a very low cost of living area can be a bigger selling point for recruiting.