How should I structure compensation for my early employees?
Dominic Jacquesson, VP of Insight & Talent at Index Ventures: At pre-seed and seed stage, the compensation you offer your team members will be shaped by five factors. These are the same factors as in more mature companies, but the constraints and balance between them are different at early-stage:
Market benchmarks. You can use services such as OptionImpact, OpenComp, or Pave to supplement your own collated insights on benchmarks. Benchmarks are tied to a specific role — function, specialty, level, and location.
Internal consistency. This is critical, as it underpins both fairness and diversity. You should assume compensation transparency across your team, even if you don’t encourage it. Never offer compensation to one employee that you wouldn’t feel comfortable explaining to any other team member.
Individual candidate expectations. What do you need to offer in order to close a desired candidate, and what are their individual circumstances and needs? Do they support family members, or have mortgage commitments?
Your financial constraints. What salaries can you afford in terms of your cash runway?
Your compensation philosophy. This is part of the scaffolding of your company culture. You need to consider cash vs equity, cash/equity trade-offs, base vs bonus, individual vs team bonus, while benchmarking to 50th (average) v 25th or 90th percentile of the market.
For pre-seed contributors (non-employees) who you can’t afford to pay at market rates, you can compensate them using a sweat-equity formula:
(Contributor fee-rate x Time offered for free) / Notional valuation
Eg $1000 day-rate x 60 days offered for free / $6m notional valuation = 1% equity equivalent
If you hire a few early employees before you have a priced round (ie pre-seed or SAFE: Simple Agreement for Future Equity), you can also consider offering straight equity (with a reverse-vesting schedule) instead of stock options.
For hires in the early days, salaries will have a natural ceiling due to cash constraints. Even for experienced engineers in the Bay Area, this ceiling at seed-stage is currently about $175k, and more like $110k in Europe. The only way you can adequately compensate them is through generous stock option grants, up to 1%, or in exceptional cases 1.5%. For mid-level technical hires, this package could be more like $120k and 0.5%.
If you need to hire a seasoned leader or operator — such as a chief operating officer (COO) who isn’t a co-founder but has a complementary skillset to you as founders — you could offer as much as 3% equity. If you reverse-engineer from a possible $1bn exit, even after dilution and without top-up, these grants could represent $2.5m for a mid-level engineer, $7m for a highly-experienced engineer, and $15m for a seasoned leader. You can share these scenarios when you table an offer, but be careful not to over-hype as this can damage your credibility and set unrealistic expectations. Always focus first on the opportunity and on your vision rather than the financial upside, just as you do yourself as a founder. You are looking for missionaries, not mercenaries.
For more detailed guidance on stock options for early stage startups, check out the Index Ventures Rewarding Talent handbook and OptionPlan app.
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