How much should I pay my first employees?

Author:

Josh Durst-Weisman

Published date:

September 9, 2021

Startup founders often ask what they should pay their early employees. Learn more about compensation strategies for early startup employees.

Contents

• How much should I pay my first employees?
• Preparation and resource planning
• Architecture and philosophy
• Selling the dream to candidates

One of the most common challenges that you’ll face as a startup founder is growing your team—from sizing the employee option pool to sourcing quality talent, all the way through writing an attractive offer letter. There are two compensation-related questions that every founder needs to answer:

1. How do I find great candidates?
2. When I find them, how much should I pay them?

Failing to properly answer either of these questions can have material effects on your company’s growth. That’s why it’s never too early to think about your compensation plan: the philosophy and architecture that defines how your company pays people.

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Preparation and resource planning

How should you think about budgeting for new hires? You’ll need to strike the right balance between cash compensation and equity compensation, which can vary based on the cash and equity reserves you have available.

Key takeaways:

• It’s common for your first, most crucial hires to ask for 1% of the company or more.
• For this reason, it’s important to allocate the right amount of equity for your employee option pool.
• Most founders use industry survey data to learn how much different roles get paid (though these surveys tend to come with varying degrees of reliability).
• In the early stage, when cash is your most constrained resource, you’ll often need to offer less base salary than your peers (40-50th percentile).
• This means you’ll likely need to offer more equity than other later-stage companies (70th-90th percentile).
• The ratio of cash to equity tends to change over time. Be ready to adjust your strategy as you mature.

Architecture and philosophy

When you hire new employees, you’ll need to decide what to pay them—which means figuring out which level they hold within the company: entry-level, mid-level, senior, leadership? You’ll need to define your philosophy around the responsibilities of each role and build a compensation architecture that maps out how each role gets paid.

Key takeaways

• If you’re an early-stage company, you’ll want to create a leveling system that’s simple and scalable.
• Later-stage companies tend to have between six to eight levels. This is overkill for early-stage companies.
• Typically, companies create unique levels for both leadership roles and individual contributors.
• These levels start simple, and become more complex as you grow.

Selling the dream to candidates

When you’re recruiting employees for your team, how should you think about incentivizing them? Joining a startup is risky for any employee, so you’ll need to create an attractive value framework to show them why the risk is worthwhile.

Key takeaways

• Approach 1: Pick three scenarios that your company could potentially reach in the future—a low, medium, and “best case”—to walk your candidates through, to show the dollar value of their ownership and make it real for them.
• Approach 2: If you can, pick comparable companies in your industry that have had exits and compare your company to theirs. This helps tie your potential trajectory to theirs.
• Don’t deliver offers in writing or over the phone. Do it face-to-face. This is a very personal decision that deserves a personal interaction.