How to Get Early-Stage Startup Compensation Right

Early-stage compensation is tough to get right. 

And here’s the thing:

No one is really happy with their compensation, and there is no perfect comp structure. 

Still, it's important to be thoughtful and put your best effort into creating a compensation system that's fair for your team.

I recently gave a talk to YCombinator founders on hiring and compensation for startups, and the lessons we learned scaling Pulley from 15 to 50.

Here’s what I shared.

There is no one size fits all comp framework 

We talked to several founders & HR folks. They all say the same thing:

The one sizes fits all compensation framework is a myth. The framework that fits your startup depends on your stage.

Early-stage comp packages are going to be equity-heavy. You can’t compete on cash compensation at this stage.

Settle on a framework that fits your cash availability and equity goals. You can comp within the 50th percentile for salary and the 90th percentile for equity. Or give greater cash comp in exchange for equity. 

What matters is the same framework across roles to stay consistent (variance by country is common).

When creating a comp system, keep these three guidelines in mind:

1. Create a system that revisits compensation only 1-2x a year
2. Benchmark against market norms on Pave, Wellfound (formerly AngelList), GlassDoor, etc.
3. Create a framework for compensation that you apply across the team, and stick to it

Equity is a key part of startup compensation 

Equity is the only asset your company owns that can 1000x in value (with no guarantees, of course).

This is the largest benefit you are giving, and it's your biggest leverage in hiring conversations. It’s the main reason employees bear the risk of working at a startup in the first place.

Do NOT undersell your equity.

Most candidates don't understand the value of equity. Walk them through:

• Growth potential by comparing to similar startups
• Relative discount of common vs preferred shares
• Your high-level growth plans

Discussing what equity could be worth at different growth stages can be a helpful exercise for helping candidates understand the value of equity as part of a comp package:

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Lean towards transparency on equity conversations 

Similarly, it’s important not to oversell your equity. Good candidates are smart. Acknowledge there is a chance it goes to $0.

Here are the basics you should share: 

• The percentage of equity on offer
• Vesting schedule (stick to standard 4 years and 1-year cliff)
• Strike price of the options

The offer letters we use at Pulley provide all of this information in a format that’s easy to understand, even for applicants with no equity experience.

Here’s what it looks like:

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Don’t compete against FAANG 

Whenever I speak on early-stage startup compensation, the most common question I get asked is this:

“How do I compete against FAANG?”

TL&DR: Don’t compete. 

You can’t win on cash comp. Potential equity growth is your biggest point of leverage in compensation conversations, coupled with:

1. Your company culture and team
2. Career growth opportunities 

Remember, your goal is not to close every candidate. You only need to close just the right one.

Front-load compensation discussions to prevent surprises  

Going through the whole interview process just to find out that you’re not a fit on comp is a painful experience for both you and your applicant.

Avoid this unwelcome surprise by getting to a discussion on compensation early. Understand what matters to the candidate outside of compensation, and make a strong first offer.

That might include:

• Equity options
• Flexible working policies
• Equipment allowances
• Career development opportunities and paid training

Outline your benefits clearly in your offer letter:

Optimize for closing, not interviewing candidates. If you’re wasting your time, you both want to know early.

Give candidates a choice between equity and salary to meet their needs 

Increase your chances of closing ideal candidates by offering multiple compensation options.

For instance, you might put forward three packages to a candidate:

1. Higher cash, lower equity
2. Higher equity, lower cash
3. Middle road for each

A senior developer with kids will probably pick the cash-heavy option, whereas a recent graduate with a much higher risk tolerance is more likely to lean toward the higher equity alternative.

Putting these options on the table allows candidates the ability to pick the comp package that works best for them.

Make startup compensation easy to understand 

When you do present your offer to a candidate, the compensation options you present should be transparent and easy to understand.

We made it easy for you to explain comp in your offer letters on Pulley.

Founders can plug and play different comp packages, making it much easier for candidates to understand their options.

Check out our sample offer letter here.

If you want to learn how to better explain equity to candidates, our cap table experts at Pulley are always open to chat.

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Read Next: How to Scale a Startup in 3 Months