The Quick and Dirty Startup Founder’s Compensation Guide
Most startups fail. It’s hard to bring a new, needed, and differentiated product into the world. It’s even harder to get customers to find it, try it, and pay for it. It’s hard to raise money. It’s hard to keep customers happy. It’s all hard.
But the hardest of all is to get great people to join your startup. As a founder, you need to convince a candidate to join a company they may not have heard of, has a high risk of failure, and can’t pay the same salaries as larger, name brand companies.
To have a chance of solving this, you need to master compensation almost as soon as you start to grow your company beyond the founding team. Many founders struggle with it. Many have never hired and managed people, or if they did, it was at more established companies that may have trained them on compensation policies, but not on why those policies exist. They certainly weren’t in the room when the compensation strategy was originally developed.
This guide shares what I’ve learned about compensation from my experience as a multiple-time startup founder as well as working with the Point Nine portfolio and some of my own angel investments. This is not a guide for Human Resource professionals or for companies with dozens of employees. When you get to that scale, you’ll need a great VP of HR who is a compensation pro. This guide is to get you off to a good start as you build your initial team and lay the foundation for an amazing team and a solid culture.
We’ll walk through a series of principles that underlie compensation and then move onto some specific tactics you can use. We’ll start with:
You Operate Within a Market
Founders are solipsistic by definition. They are focused and passionate about their startup, assume everyone else will be, and view the world through that narrow lens. They know how many people they need to hire and how much money they have to pay them, so they try to build a team from those constraints. They often budget for smaller salaries than are realistic, and they can get frustrated as candidates say “no” to offers that were based on what their startup could “afford.”
Candidates don’t care what you can afford. Your company operates in a labor market, and anyone worth recruiting could just as easily get a job at another startup, a big company, or even start their own company. If you want them to join your company, you need to offer compelling compensation that stacks up well against the alternatives.
This is easy to say but hard to do. How can your small startup compete, especially against larger companies that can offer higher salaries and better benefits? Don’t worry, you can, because of the second principle:
Compensation is More Than Just Cash
If salary and benefits were all that mattered, your startup would stack up against larger companies like this:
And no one would work for you, except for people who were unable to get a job anywhere else, who are probably not the people you want.
But the world is full of startups with incredible teams, so something else must be going on. That something else is that candidates value more than just salary and benefits. They also value:
Learning and Career Development. A fast-growing, well-run startup is the best learning opportunity in the business world. Its team needs to solve multiple challenges across many disciplines in a short time frame. Team members rarely encounter silos or hear, “that’s not your job,” since the company needs all of the help it can get and is usually making things up as it goes along. As a startup grows, it promotes from within when it can, offering a fast track career path for great people to rise quickly through the ranks instead of waiting around paying their dues at a sluggish, hierarchical, traditional company.
Excitement and Camaraderie. Working as a critical member of a small team trying to accomplish something hard where the stakes are high is exhilarating — like being on a sports team where everyone is pulling together to win a championship. The highs are higher, the lows are lower, and every day is different. Lifelong friendships are formed in the trenches. Not everyone wants to just collect a paycheck — some want to care about their job and are willing to absorb the risks, volatility, and hard work that a startup requires if it lets them wake up in the morning dying to jump into the day’s challenges.
The Work. Many people choose a startup for the opportunity to work on the specific problem that startup is solving. They may want to work on creative solutions in education, health care, or consumer areas like fashion, food, or sports. Some are drawn to solving problems for businesses or using their talents in machine learning, design, or marketing to bring new products to the world. They will seek out and join a company for the opportunity to work on those problems and get great satisfaction bringing those solutions into the world.
Equity Upside. Candidates want the large equity grants that may be worth a fortune if they pick the right startup and help it succeed. Larger companies often give no equity or give equity in a narrow range, where employees are guaranteed a modest payout but won’t achieve a life-changing exit.
The candidates you want will weigh those factors and will evaluate an offer from you like this:
And they’ll join you because the overall package is compelling, even if you don’t offer the highest salary.
But none of this happens for free just because you are a startup. You need to:
Actually offer the things that only a startup can. Give large equity grants. Trust your team and share information liberally. Give people challenging assignments and tolerate a few failures. Reward the best people and, when needed, move out the ones who aren’t performing well. Your advantage as a startup is that you can offer opportunities and experiences that traditional companies can’t, so trust your people, and share the wealth.
Recruit candidates who value what you have to offer. Recruiting a candidate who is looking for growth, learning, excitement, likes the problems you are solving, and is willing to take some risk is a good use of your time. Someone who wants a safe choice and a guaranteed outcome is not. If you find yourself twisting a candidate’s arm to turn down an offer at a big company to join your company, you are probably talking to someone you shouldn’t pursue since they haven’t yet decided what they value.
Your recruiting process needs to attract the kind of people who value what you can offer. Be explicit about who you need in your job descriptions. Train your team to share with candidates what your company values, both the good and the bad. Disqualify people early in the recruiting process as soon as you see that you are not what they are looking for. Be honest and frank about the risk of failure, but also get them excited about the opportunity for growth.
Sell the opportunity. Never assume that someone wants a job just because they are interviewing with you. The best candidates have lots of options, and they are interviewing you just as much as you are interviewing them. Throughout the recruiting process be polite, respectful, and leave lots of room for questions. Once you’ve decided there is a match, walk them through your fundraising pitch, your strategy, and your operating plan. Give them a demo and have them meet your most compelling team members.
But even folks who value the learning, excitement, and upside of a startup still need to get paid, and you will struggle when your budget doesn’t seem like it will stretch to hire the people you need.
Which brings us to the next principle:
“10x” Is For Real
Once you start to build your team, you’ll face constant tradeoffs like:
- Do I budget for more senior, higher-paid candidates, or do I hire more junior lower-paid folks?
- Do I offer a great candidate a little bit more to get them to join, or do I stick with my salary guidelines and risk losing them?
- Do I set aside a budget to give raises to our best people, or do I put that cash into hiring more people?
These are all different versions of the same question: is it better to build a larger team of less talented and less well-paid folks, or should you put your dollars behind a smaller number of stars? Would you rather have a team of ten average people or nine amazing people who are each paid 10% more?
Go after the amazing people.
You’ve probably heard of the “10x Engineer,” the legendary whiz who can produce the work of 10 average engineers. These people absolutely exist, and not just in engineering. A great sales rep can produce many times the revenue of an average rep. A great marketer can generate leads worth millions of dollars. A great recruiter can bring in dozens of equally amazing people. The startups that win their markets always have those people.
Even if the performance gap were 2x, not 10x, the math would still be easy: the gap between average people and the standouts is so wide that you should put all of your effort towards finding and keeping the stars, even if you need to pay them a bit more and spend more time and effort recruiting them.
This doesn’t mean that you should throw money at people — you don’t want people to join you just because you were the highest bidder. But it does mean that you should put your energy towards attracting great people and then, once you find one, make sure that compensation is not a barrier to their joining.
But once you find those great people, you still need to figure out what to offer them, which brings us to the next principle:
Data Sets You Free
Let’s return to the first principle: “You Operate Within a Market.” When a candidate is considering joining you, they compare your offer to that market, which means you need to know what peer companies are paying in the geographies where you hire (or to remote employees if you are a distributed team).
If you’ve heard the expression “you are entitled to your own opinion but not your own facts,” you can think of this data as the “facts” of your market that exist independent of what you’d like them to be.
This compensation information is usually laid out in a “career planning matrix” or “career ladder” which lists job levels, titles, responsibilities, and compensation ranges. You can easily find examples on the web, but for illustrative purposes, this is a very simplified example:
This “ladder” is the foundation of the employee lifecycle.
- When you open a new position, you use the ladder to decide what kind of person you need, how to write the job description, what title to use, and what you should budget for.
- As you interview candidates, you evaluate them on how well they match up against that job description.
- You base offers on the compensation ranges in the ladder.
- When you consider team members for promotion, the ladder helps you answer if that person is capable of performing the job at the next level.
The employee lifecycle could be a series of blog posts in its own right, but sticking to compensation, you need to obtain data for your market and then keep it up to date. The data is available from many sources:
- Data points from candidates you interview.
- Public sites like Levels.io.
- Commercial compensation providers like Radford.
- Datasets your investors and advisors may have access to.
- You and your team members’ compensation at previous companies.
- Your peers at other startups.
- Recruiters.
- Startups like Pave, who are focusing on this problem (caveat: I have not tried them).
The data will be sliced and diced by position, geography, and stage of company (series A, series B, etc). You’ll compare yourself to other companies at your stage. Note that startup compensation data can be hard to get since most compensation studies focus on the larger companies who are willing to pay for this data.
How do you use this data? You should:
First, figure out your compensation strategy. Do you want to pay at the high end of market, the bottom, or the midpoint? Most companies target near the midpoint (50%) of the market. It keeps you from losing people because your offers are too low, but it also keeps you from attracting people who only picked you because you offered them the most money. You generally want compensation to be a non-issue when someone chooses your company. It should not be the only reason they chose you, but it also needs to be high enough that it’s not a barrier to their joining.
Base your offers on this data. When you open a position, be clear about the level and salary expectations so that you don’t waste time with candidates where there is a mismatch. When you start to make offers to candidates, base them on the range and on where a particular candidate fits relative to the experience and skills needed for the job.
Be flexible. The data is just a guideline. There are times you want to go higher in the range for a candidate who is at the high end in terms of experience and skill, and there are times when a candidate’s experience is at the low end of the range, where a lower-than-average offer is appropriate. And don’t get too locked into a title or years of experience. If you are looking for a mid-level engineer but you run into a great new college graduate you wish you could hire, you can always change the title and compensation and take the opportunity to land that person. As always, the focus is building the best team, not being slave to guidelines.
But what happens when a candidate wants to get paid more than the data suggests they should? This brings us to the next principle:
Negotiation is Overrated
Inexperienced founders sometimes think running a business is like in the movies: a series of rough and tumble negotiations where each side maximizes their gain. New startup founders often see their role as making the dollars stretch as far as possible by making lowball offers to candidates and negotiating hard, pushing them take the lowest salary they will reluctantly accept.
This might seem right, but it can cost you more than it saves you in the long run.
A bit of negotiation is normal and productive — it helps both sides validate that you have a shared understanding of what the candidate can contribute and that your compensation data is correct. But if your recruiting processes usually turns into a series of drawn-out, painful negotiations with every candidate, you could suffer from:
Internal inequity — you don’t want to build a culture where the candidates who negotiated hard on the way into your company get paid more than people who didn’t negotiate. Your team will eventually learn each other’s salaries, and internal inequity can create resentment, penalize team members who are more introverted or inexperienced, and can set you up for legal issues since there are often gender or cultural differences in how people negotiate. You don’t want to spend months training and integrating a new employee only to have them unexpectedly quit when they learn that you low-balled them on the way into your company.
You can hire the wrong people — while you don’t want to penalize people who advocate for themselves, overly aggressive negotiators often do not do well at startups. Someone who believes they should be paid far more than their equally-talented peers often does not work in the best interest of the company. They might be combative and aggressive to work with, and managing them might turn into an endless series of ongoing negotiations for more money and a better title. They often don’t stick around, leaving as soon as they get a better offer (and there is always going to be a company out there that will pay a bit more).
It sets a precedent. If you reward the negotiators with higher compensation, you’ll eventually need to raise your entire pay structure to maintain internal equity, which means you are paying more than you need to across the board because you weren’t willing to say “no” to candidates with outsized expectations.
Again, this is why, “the data sets you free.” Base your offers on the market and on where a candidate falls within that market. If a candidate asks for more, base the discussion on the data. Ask if they think your market data is wrong. If not, ask them why they believe they deserve to be paid more than other people at their level. This might mean walking away from a candidate whose expectations are too high, but it can also mean voluntarily paying a non-negotiator more than the minimum they would have accepted in the interest of internal equity.
Which takes us to the last principle:
Don’t Forget Why You Hired These Folks in the First Place
Your ultimate goal as a startup founder isn’t to hire people — it’s to build a great company by shipping and selling incredible products that customers love. Hiring a great team is how you make that happen. You can only judge your compensation strategy by how much the people you hire contribute to your company in the months and years after they start working for you. This means:
You want to hire people who stay. You don’t want people to leave the company because they are underpaid and resentful, nor do you want people who leave as soon as another company makes them a better offer. You also don’t want to hire anyone ambivalent about your product, market, and team. They won’t stick. Hire people who are excited to be with you, even if it takes a bit more time to find them. When you find them, make compensation a non-issue. It shouldn’t be the sole reason someone joins your startup, and it shouldn’t be why someone doesn’t join or quits.
If you make a mistake, fix it. No matter how great you are at recruiting and compensation, you’ll hire some of the wrong people. You have to learn to give people tough performance feedback, help them improve, and ask them to change roles or leave your company if they don’t. Every startup struggles with handling bad hires, and almost every founder is too slow and too reluctant to fix people problems. Underperformers can kill a company.
Budget for promotions, raises, and market adjustments. Time at a startup flies, and it won’t be long before you have team members who have been with you for a year or are candidates for promotion. You need to build salary adjustments into your budget. Yes, early stage startups sometimes ask their team to accept a flat salary until a major milestone (usually a round of funding), but that only buys you a few extra months. People will eventually need to keep pace with the market (back to the first principle). Accept that, and plan for it.
None of this is easy, there are no hard and fast rules, and you’ll make mistakes, but you can’t go too far wrong if you keep these basic principles in mind.
Good luck!
