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Compensation at Startups
In the beginning stages of hiring key talent for an early stage company, an engaged founder may spend anywhere
from 40-50% of his time recruiting key hires. Having a clear philosophy around compensation and rewards is
essential to do this eectively. Additionally, you can benet from access to up-to-date compensation tools and
resources to help hire and retain the best talent.

Why is it so important to have a philosophy around compensation early on? As a company is growing and
establishing its culture and values, it needs to make sure that its compensation philosophy is aligned with the
companys overall mission and values. For example, a company that identies with transparency as a value,
needs to make sure that its compensations practices are transparent. Anyone involved in the decision making part
of the hiring process should be able to communicate what the companys compensation philosophy is and how it
aligns with the companys overall values. The people involved in making the oer and negotiating salary or equity
should know all the steps and data points it takes to arrive at the nal oer. They need to be able to explain the
how and why.

We all know people who winged it when it came to hiring and putting compensation packages together for
employees in the early days. This may work for a while. However, its likely to lead to later adjustments and
readjustments as you hire more people. The internal inequities become more visible and it becomes harder to x
with each additional hire. The sooner you think about compensation, specically how you dene your
compensation philosophy, the stronger the position youll be in to hire and retain the best talent in the market.

Every company needs a compensation philosophy that supports the companys mission and values. Your
compensation plan should be able to attract, motivate and retain employees. Youre going to be in a position to talk
about why you are doing certain things as a company and need to be able to convey these thoughts clearly and
consistently to candidates. Some questions to consider:
Are you a pay for performance company? If so, can you explain your bonus plan or sales compensation
plan to a potential candidate.
How do you want to reward your employees? Through public recognition? Equity? Personalized gifts, spot
bonuses or peer bonuses?
Will a manager have discretion regarding the type of recognition or is this up to the executive team?
How often are spot bonuses awarded?
Are bonuses dierent for revenue generating employees vs. non-revenue generating employees?
Are you committed to maintaining internal equity on the team?

Salary Bands

As you think about building out a team, youll want market data to ensure youre making hires within the right
salary bands. Its much easier to have a conversation with a candidate when you have market data vs. what youve
just heard from your peers. Creating salary bands with multiple seniority or experience levels early on will help
navigate tricky internal equity discussions down the road. Additionally, as you make more senior hires there will
be fewer adjustments on both cash compensation and equity.

Develop a compensation structure with pre-set levels and corresponding bands for salary and equity to
minimize subjectivity. Salary.com is a great place to start. Lets say you need to hire your rst Sales Engineer in
San Francisco but you dont know where to start in terms of guring out how to pay this person. You can look up,
by title, what someone in this role makes and then rene further by any of the following: location, years of
experience, education and number of direct reports. The results will show dierent percentiles ranging from 10th
to 90th. This makes it very easy to create a salary band for Level 1 of a Sales Engineer, for example, and then build
out dierent levels as the team grows.

Promotions/title changes need to be tied to the salary ranges in corresponding levels or bands. There may be
exceptions to the rule. Create an exception process with a clear approval process. Do the hiring manager and the
hiring managers boss need to be included? HR or Finance? Map it out and make sure the process is clear. The
important thing is to make sure the same process is followed every time you go through the compensation and/or
promotion process.

Homebrews compensation philosophy

We have developed our own philosophy around compensation at Homebrew based on experiences at dierent
companies and our values around compensation and equity.
We believe in paying market average salaries (based on the phase of startup you're leading) and over-equitizing
early employees to provide a compelling compensation package and strong alignment of interests.

Why do we recommend over-equitizing early employees?

We want to adjust the risk/reward for employees betting on an unknown company that may not even have a
product yet.
We are getting people to make a commitment to a management team, a mission, and an idea that may or
may not become a protable business.
We want to hire people that truly believe in the companys mission and by giving them substantial ownership
in the company early on, we are making them partners in the mission.
This is not about taking a job -- this is about building something meaningful.
How does this impact hiring the best talent?
Many employees have taken pay cuts from larger companies and a strong equity oer will help close the gap.
A strong equity package explained by a founder, board member or investor with a compelling story will help
close a candidate.
Early employees want/need to feel valued and have skin in the game. Owning a piece of the company may
be more important than cash/base salary. This will be particularly true for someone who has had a
successful exit from a previous company.
As the company scales, you will need to bring on more senior talent with depth of knowledge rather than
breadth of knowledge. Industry experts are expensive. You wont need to adjust salaries for everyone if
equity takes care of the salary gap.
Molly Graham from Quip has some solid rules regarding compensation that we wholeheartedly agree with. We
encourage you to revisit these when you are negotiating compensation with candidates or raises with current
employees.
 1. No one is ever happy with compensation, and compensation has never made anyone happy (long term). Get your
candidates to buy into the vision of your company and fall in love with the team. Compensation will not be
the reason someone stays at your company for the long haul.
2. People always nd out what everyone else is making. We know your parents told you never to talk about money
but people do. Potential candidates nd out things while they are interviewing from former employees and
once they are hired from current employees. Assume that everyone knows everything. Founders, hiring
managers, recruiters should be able to justify every employees compensation. This is a good way to sanity
check every comp decision.
3. Revisit compensation only 1x per year (max 2x per year). Dont over complicate things. If performance reviews
are tied to compensation, then manage expectations (1 raise per year pending performance). This can be in
the form of equity vs. salary (recommended for start ups). If someone is coming from a larger company, they
probably expect a raise every year regardless of performance. Make sure you set expectations accordingly.
4. On the spectrum between formulaic and discretionary compensation, be as formulaic as you can. Be transparent
with candidates regarding your companys compensation philosophy. This is why it is so important that
everyone involved in the interview process fully understands the companys philosophy and is comfortable
selling it to all levels of candidates. Dont lose a candidate because another startup is giving them more cash
in the short term. Make sure they understand how to value their equity.
Source: http://rstround.com/review/A-Counterintuitive-System-for-Startup-Compensation/

Base salary and equity

How do you put the right compensation package together? For an early stage company, cash is the most precious
resource. Its important to balance the right amount of cash and equity in an oer so that 1) cash ow is not a
stressor for employees and 2) equity is parsed out in thoughtfully so there is equity still available for future hires
and refresher grants.

BALANCE CASH AND EQUITY

For base salary/cash, we recommend targeting the 50th percentile. For equity, we recommend targeting the
75th percentile. Below you will nd salary bands for an Engineering Manager from Advantage HR/Option
Impact survey. 294 Companies were surveyed and segmented by the amount of capital raised. If you target the
50th percentile for a company that has raised between $0 and $10 million, youre looking at a base salary of
$139K. This number gradually increases as the amount of capital increases. Pretty simple.

A B C D E F G H
Base Salary All >0-10M >10-25M >25-50M >50-75M >75-100M >100M
294 10 34 66 36 38 110
# of
companies
$153,055 $133,070 $145,792 $147,001 $155,736 $157,437 $158,359
Average
$100,000 $100,000 $120,000 $100,000 $120,750 $115,000 $125,000
Low
$140,000 $119,277 $127,875 $134,675 $148,374 $140,000 $143,216
25th
$150,000 $139,000 $148,450 $145,000 $153,002 $160,000 $157,500
50th
$168,800 $145,500 $160,000 $155,925 $173,750 $175,250 $175,000
75th
$208,000 $150,000 $185,000 $190,000 $190,000 $200,000 $208,000
High

We recommend targeting the 75th percentile for equity, which in the example equity bands below, equates to
0.644% ownership in company (again for a company that has raised from $0 to $10 million).

A B C D E F G H
% Total All >0-10M >10-25M >25-50M >50-75M >75-100M >100M
Equity
0.10% 0.37% 0.14% 0.11% 0.14% 0.08% 0.07%
Average
0% 0.12% 0.01% 0.01% 0% 0.01% 0.01%
Low
0.03% 0.19% 0.04% 0.02% 0.03% 0.02% 0.02%
25th
0.06% 0.32% 0.08% 0.06% 0.07% 0.05% 0.05%
50th
0.13% 0.64% 0.19% 0.15% 0.13% 0.11% 0.08%
75th
0.81% 0.64% 0.48% 0.50% 0.81% 0.32% 0.48%
High

Providing equity at a higher percentile rewards employees for taking early risk. Employees are making a
commitment to a management team, a mission, and an idea that may or may not become a protable business.
Additional equity grants (sometimes called refresher grants) should be based on performance and not awarded
until an employees two year anniversary, at the earliest, assuming there is no change in title or performance.
Seniority is a factor. We recommend refreshing employees at or above Director level at the 2 year mark and below
the Director level at the 3 year mark. The most important thing is to have a dened philosophy around compensation
and equity upfront. Be consistent and do not be afraid to enforce this policy.

Source: Advanced-HR - Option Impact, 2015 VCECS Status

This information is taken from Advanced-HRs Option Impact Survey which is the leader in private company
compensation data. Option Impact focuses on startup data from approximately 1500 companies nationwide.

Im a founder. Should I pay myself?

The simple answer is yes. You need to pay yourself for one simple reason: peace of mind. Pay yourself a salary that
allows you to live without being stressed out about your nances. Being a founder is hard enough without
additional stress about your home life. Free yourself from having to think about your nances so you can be a
happier, more productive founder.

Im a founder. How can I possibly pay a new hire more than I make?
Chances are that from the very early stages of your growth, youre going to be paying some employees more than
you pay yourself in cash salary. Market compensation for certain roles is higher than for a typical startup founder.
This isnt unusual. And remember that you likely have signicantly more equity compensation. Your salary can
always be adjusted at a later stage, but its likely to always be true that others in the company will be making higher
cash compensation than you.

Negotiation

Companies need to be deliberate when coming up with a philosophy around negotiation. This is easier to manage
when you are two co-founders handling all oers but more dicult when you grow and have more people touching
the oer process. Continually communicate and reinforce your policy on negotiation. If someone is a great
negotiator, does that mean he or she should make more than a peer doing the same job? Probably not. Some
candidates have help along the way (a mentor coaching them, inside information from current employees, etc.)
that allows them to negotiate more eectively. If you want to have a level playing eld, have a clear policy on
negotiation where recruiters/hiring managers understand salary bands and an exception process for going outside
of the guidelines. You should make it clear at oer stage that certain parts of the oer (base, bonus) are not
negotiable, if that is your policy. Problems arise when theres no clear policy.

Because it can be dicult to value equity in an early stage company, Homebrew often recommends presenting two
dierent oers to a candidate. This asks the person to make a clear choice about his or her compensation
preference.

For example:
Oer A) Base Salary: 125K Equity: 1.25%
Oer B) Base Salary: 200K Equity: .75%

Oer A will be more appealing to someone for whom equity is the primary motivator and who may be willing to
take a cut in cash. Oer B will be for the more conservative candidate who can not take a cash cut in the near term.
Assuming you are managing the candidates expectations and having conversations about what is most important
to the candidate (cash or equity), you should be able to put together a solution where both parties feel positive
about the negotiation and understand the value of the oer.

Compensation Resources:
AdvancedHR - https://www.advanced-hr.com
http://rstround.com/review/The-Right-Way-to-Grant-Equity-to-Your-Employees/

The Oer Process - Timing

There are dierent schools of thought around what works best. Verbal oer, written oer, when and who should
make the oer? Lets make it simple.
Founder makes verbal oer to candidate and discusses potential start date.
Give candidate time (2-3 days for IC role and longer (~1 week) for executive level candidate) to process and
ask questions about oer.
Negotiation period of 3-5 days. More for candidates where relocation is involved and for executive level
 candidates.
Both parties come to agreement on numbers. Candidate accepts verbally and commits to a start date.
Company generates written oer letter/employment letter.
Candidate gives notice at current company..
Homebrew recommends coming to a verbal agreement prior to putting together a written oer letter. Youll save
time and energy going back and forth revising written documents. The terms of the oer will be agreed on verbally
and the candidate will want something in writing prior to giving notice if he or she is currently employed. Agreeing
on a start date will help with a smooth transition for both parties. The candidate can be clear with his or her
employer and will have built in the appropriate transition time. Leaving a start date tbd leaves room for
overthinking an oer and potentially changing ones mind (worst case scenario). It also leaves room and time for
getting poached by another employer.

What if there is a signicant amount of time between the time a candidate leaves the old job and starts
the new one? This happens when a candidate has a previously planned trip or just needs down time. We dont
recommend you try to talk them out of this time. We believe people need time o to recharge between jobs. What
we do recommend is communication during that time. Reiterate how excited you are that they are joining by
sending an email, a postcard or a text message. Share any recent news about the company, product or team. These
small gestures have high impact. Several days before the start date, its nice to have the hiring manager reach out
to see if the new employee has any last minute questions about the start date. Use this as an excuse to reconrm
start time and share a high level overview of what the rst day/week will look like.

Who should give the oer? In seed stage companies, this will be one of the founders. As your company grows,
the founder or hiring manager may not be the one negotiating and giving the oer. This typically becomes the role
of the internal recruiter or HR manager. Although it may be dicult in some cases for the founder or hiring
manager to relinquish this responsibility, this needs to be the role of the recruiter consistently. Candidates should
not be put in a position of negotiating with the person they are working with/for on a daily basis. Leave this to the
folks in HR.

Best Practices for Closing

Youve made a great oer. Now what? There are many things you can do (and not do) between the time you make a
formal oer and the time a candidate has to accept.

DOs

Reference Checks

The most telling reference checks are what we refer to as back channel/back door references. These are not the
references that the candidate gives you when you ask for formal references. The list of people that a candidate
gives you is a list of people that have been coached. They are conditioned to say positive things which is why the
candidate asked them to be on the reference list. Enough said. Reference checking should be used to address any
concerns or dig deeper into any areas that a hiring manager/founder feels necessary. You will get the most candid
responses from people who are not on a list the candidate has given you.

How do I go about doing this without breaching the candidates condentiality if he or she is employed? First
and foremost, do not call any contacts who currently work with the candidate. You only want to call your most
trusted contacts who will not compromise the candidates condentiality. Look at your own network and leverage
your investors network. Homebrew is constantly helping with back channel references and this is a very important
part of helping our companies grow. Have a clear understanding of what information you are trying to get. You
may only have 10 minutes with someone and know exactly what you are going to ask. If you have 3 people to
leverage for references, gure out what the biggest concerns are and divide accordingly. Go deep with each
reference rather than trying to cover too many areas.

Put an expiration date on the oer letter and a start date

A candidate should have a nite amount of time to review the oer and have any questions answered. 3-5 days is
fairly standard for most candidates. About a week is typical for candidates where relocation is involved or for
executive level candidates. They need to gure out potentially when they will give notice and build in time to
honor any commitments. The start date can always be changed but it makes things more tangible to have a real
date.

Arrange a sell call with someone at the VC rm or board member who is a strong ambassador for the
company

This is where Homebrew or someone on the board can help. Between Homebrew and our advisors we are happy to
jump on the phone with a candidate when its decision time. We help with questions about company vision, equity
value, culture and why Homebrew invested in your company. Sometimes we believe in a candidate more than the
candidate believes in him or herself and we need to give the candidate condence to make a leap of faith.

Send a personalized gift to the candidate and or family

Once youve made an oer, we recommend sending a gift to the candidate and/or his or her signicant other. A
nice bottle of wine, champagne or a gift certicate to a neighborhood restaurant. If there are children involved,
you can incorporate something kid friendly (food gifts are a good standby).

Oer additional networking resources the secret sauce

Relocation requires a lot of special handling. Taking a new job in a new city can be a very stressful decision. When
there is a partner or children involved, there are many things your company can do to help make the decision and
hopefully make the transition smooth. It doesnt hurt to oer job search help to the partner as well. Helping with
introductions to the internal recruiter, people in the company with similar backgrounds or recruiters outside your
organization can be very helpful. Keep in mind that the oer decision may be in the hands of two people so
anything you can do to help with a potential transition is time well spent. Additionally, if the candidate has school
aged children, it is very helpful to introduce the candidate to other people in the company with children to talk
about schools, neighborhoods, etc. The school application process can be a very stressful for families and the more
resources and support they have early on, the better for them and you.

Trust your gut

If money is a huge stressor for a candidate and your oer is signicantly lower than a competitive oer, this may
not be the right t for the candidate. You dont want someone coming in and being stressed out about a nancial
situation that will not change in the near future. Additionally, no matter how badly you want to hire a candidate for
his/her skillset, pedigree, or smarts, if your gut tells you they are not a t, do not hire. You learn a lot about a
candidate in the nal negotiation phase and if it is starting to not feel right, most likely, its not.

DONTs

Badger the candidate

Too many calls or emails can be annoying for a candidate who is in a decision making process. Make it clear to the
candidate that you are available to answer any questions but do not be a pest.

Discuss the candidate openly

Maintaining the candidates privacy is very important during this time, especially if he or she is employed. Other
than internal employees and references, you should not be discussing this persons candidacy with others. Even if
the candidate is not in a job, you dont want to bring attention to this candidate because this could jeopardize you
closing him or her. Dont make an assumption you have closed the candidate until he or she has signed the oer
letter and given you permission to communicate the news to a broader audience. Assume he or she needs to work
on a communications plan with the current employer before communicating the new position.

Negotiate Against Yourself

If you've put your best oer forward do not let the candidate continue to come back with requests for just a little
more salary or a little more equity to close the deal. You will often be negotiating against yourself. There may be
situations where the candidate get a counter-oer from their current employer (especially if they're a valued
employee at a company like Google). There are two ways to handle this. First, prepare the candidate in advance
that they're going to likely receive a counter-oer. Second, decide in advance if there's any higher you'd go in your
oer to conrm the candidate. That way once the candidate comes back to you with a rm counter, you won't
make an emotional decision but rather know your compensation boundaries in advance.

The Oer Letter

Your company should have a simple template for an employment oer letter. If you dont, here is an oer
template. Make sure to have outside counsel review your template prior to sending to any candidates. eShares has
a model for explaining equity, benets, and reporting structure in a very detailed oer. They make it very easy for
the candidate to understand all the components of the oer in a straightforward, organized way.

What is the long term plan?

Managing compensation is an ongoing process. This is not something you can pay attention to once per quarter
and expect everything to fall into place. Comp needs ongoing evaluation, review, and best practice reviews with
peers, advisors and investors. Until you have someone in your company focused on compensation/rewards, it is
the job of the founder to set the tone and reinforce a consistent policy for how you want to compensate your
employees. Leverage the help of your investors and advisory board, if possible. Some of these folks may have
served on compensation committees of large companies and bring signicant experience to the table. When you
are ready to hire an internal recruiter or HR partner, look for someone who either has prior experience setting
comp guidelines or a genuine interest in learning. There are great resources (some free) in the market that you can
use until you have someone fully dedicated to compensation and rewards. Here are a few we recommend:
www.glassdoor.com
www.salary.com
https://www.paysa.com/
https://www.advanced-hr.com/
https://www.worldatwork.org/
https://www.linkedin.com/groups/2894430/prole

Please feel free to reach out to Homebrews Head of talent beth@homebrew.co with any questions.