A Founder's Guide to Startup Compensation
You found the perfect person for a role. Woohoo!
But wait.
You’re an early stage startup.
Cash is tight.
This “perfect person” can make way more at a large company. You know it. They know it.
How do you get this person over the finish line without putting your company in a precarious cash position (aka pay them more than you can afford)??
Here’s my top 4 recommendations for founders when thinking about and making offers to key employees!
1. Understand what they care about.
You have a lot to offer as a startup.
High salaries are not one of them. 😂
But you do offer:
Ability to make an impact and do meaningful work
Fast career growth
In-depth, behind-the-scenes business exposure
Daily access to the CEO 😉 (sounds ridiculous to you but it’s great learning and rarely happens at larger companies)
Stock options with exponential growth potential
Great culture (hopefully!)
Small team
Make sure you’re asking lots of questions to understand what the candidate is looking for and why so you can lean into that.
Unlike big companies, you can craft a job role, title, comp, description to match what a person is looking for.
Use your competitive advantage.
2. Titles, flexibility, impact, and culture are free.
Salaries, healthcare, 401k matches, and many other benefits are expensive.
Even stock is not “free” (even though it may feel like Monopoly money at the moment!) because there are long term implications to fundraising and exit strategy if your cap table is overextended.
Here’s what you can offer:
Big title — “Head of” titles give you the ability to define levels (e.g. are they a VP or a Director?) later. But if someone great wants to be a VP, why not? Yes, you may have to layer them later (hire someone more senior who becomes their boss) BUT that’s a high class problem that many companies never have. Just like angry customers are a good sign, so is needing to hire more experienced leaders.
Flexibility — yes, you work your ass off in a startup. But letting people work from home a few days per week, work while traveling, or come in late/leave late do not cost you anything. As a working mom, the ability to pick my kids up from school when I need to is worth 10s if not 100s of thousands of dollars in salary. Seriously. Because that’s how much you’d be paying a nanny anyway.
Impact — people want their work to matter. I took a 25% pay cut (40-50% if you include benefits) and walked away from $50k+ of stock options to do more work. I wanted less politics, more action. Don’t underestimate the persuasiveness of meaningful work and allowing people to deliver results.
Culture — working with nice, talented, passionate people feels normal to you but is unique in the working world. Set your company’s core values, align to them, and let your workplace culture shine as a competitive differentiator.
Update: An amazing founder CEO reached out to remind me that a good strategy with titles is to start with a moderate title and show a path of progression. For example, they join your company as a Marketing Manager, but you talk about (in the hiring process!) the milestones and metrics needed to be Director and then VP. They will still have a much faster career path, the title/promotion correlates to job responsibilities and results, and it’s highly motivating. It also creates an open and ongoing discussion about performance and you have more flexibility with hiring, titles, and positions.
3. Give 2 comp options.
Let the candidate choose their own (startup comp) adventure!
Option #1 - higher salary, fewer stock options
Option #2 - lower salary, more stock options
(How much equity? Here’s a great blog that we reference and share regularly.)
Note: “higher salary” = high end of the range you are comfortable with, not high salaries compared to market rate.
You can even offer a third in the middle if you’re so inclined.
Basically — let them decide what they want to optimize in their career and personal finances.
Do they need the higher base salary because they are supporting aging parents or bought a house? Can opt for more equity because their spouse is carrying the team as a lawyer?
Less stress for you to figure out the perfect salary/equity blend and you get good insight to what “I need a high salary” or “I want to have a meaningful stake” really means to them.
You want to compensate someone fairly without being irresponsible or hindering your ability to bring on other key hires.
Offering two variations of salary/equity comp is a great way to engage someone in the job offer process and be mindful of limited company resources.
4. Tie bonuses or commission to company revenue.
Most roles don’t have bonuses or commission. It’s simpler for all involved.
(Sales, of course, is a huge exception!)
I wouldn’t proactively offer bonuses or variable comp for non-sales roles but sometimes it comes up as a strategy for attracting top talent at a lower base salary.
“Your base salary is here but as you/the company performs, we’ll get you up to your required salary through performance bonuses.”
Whenever possible — especially for sales roles and for any other roles that end up with variable comp — tie bonuses or commission structure to actually getting money in the door.
Sounds obvious but it’s easy to get into bonus structures or variable comp packages related to “key metrics” for a role instead of when the company gets revenue.
Examples (OF COMP STRATEGIES TO AVOID):
Marketing manager who gets a $10k bonus for hitting the pipeline creation target (theoretical pipeline…might not turn into revenue)
Customer success manager with variable comp for # of outreach calls (make it renewal orupsell instead)
When you are big and have lots of money…go for it. Incentivize however you want.
But as a scrappy startup, you want to pay variable compensation, commission, bonuses, incentives — whatever they are — in alignment with company revenue!
Examples (OF COMP ALIGNMENT):
Commissions get paid when the customer payment is received and not simply when the contract is signed.
Why?
Encourages sales reps to follow through on full sales process, customer solvency, and make sure the customer is a good fit.Leadership team or company-wide bonuses are paid around revenue targets and cash efficiency.
Why?
Overhiring sales reps or overspending on marketing campaigns to hit the revenue target shouldn’t earn you a bonus!
Examples (OF SORT-OF EXCEPTIONS):
Business Development Reps (BDRs) often get paid commission on meetings set or demos booked. This makes sense especially if the sales cycle is longer and you have monthly demo targets. You want to keep the desired outcome and reward close enough together that it’s motivating (and financially viable for someone to pay their bills! Don’t pay demo commission 5 months after the demo happened.) Usually they will get a significant kicker (a % of the deal amount) if a deal closes!
In-house recruiters usually have a higher base salary and get paid commission when a hire “works out” aka has been with the company 120+ days.
Paying bonuses on money saved - I saw an engineer save a company upwards of several hundred thousand dollars per year with an effort to decrease hosting costs while keeping performance (it was an intentional money-saving initiative). With a measurable impact to company finances, it makes sense to pay a bonus or give a raise — as long as you’re careful with the precedent. If everyone starts downsizing tools or teammates to increase their own salary, that could get out of hand quickly. 😂
Getting top talent on a scrappy startup budget is a challenge but it’s absolutely possible! It’s one of the many places to apply your stellar sales skills as CEO 😉
Hellooooo dream team!
Who was the most amazing hire you recruited? How did you do it?
Any lessons learned or comp strategies that worked (or didn’t)??
What did you walk away from to join a startup???
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This was a great read thanks