Should I raise employee pay after a funding round?
Dominic Jacquesson, VP of Insight & Talent at Index Ventures: There are quite specific issues around pay and equity for very early employees who might have joined before Series A. They are likely to have taken a salary significantly below-market because they support your mission, perhaps agreeing to a larger option grant instead. After you fundraise, with a public announcement that you’ve just raised say $5 or $15m, you’re likely to have employees asking for a raise. That’s totally valid, and it’s important to factor in that expectation.
As a founder, you could revisit compensation during six-month performance reviews, for example. You can use the opportunity to level up and align salaries in your existing team, because otherwise you’ll end up with a situation where you’re hiring new people who expect salaries in line with your new funding level, which could create disparity between your original team and the new starters. And it’s not good to have that kind of friction in the team. It hurts morale, and eventually will lead to churn, damaging your employer brand.
It’s important to be proactive about this. First, if you wait until people ask or complain, damage is already done, and you’ll inevitably look like any raise you offer is the minimum you think you can get away with. Second, research shows that diverse members of your team are least likely to ask for a raise. So questions of fairness and inclusion are involved. Work through pay increases across your team as part of your fundraise and cashflow modelling. Ask yourself for each team member “how much would I need to pay X if I were to hire them today in the role they have?” That’s your target. You might want to stagger increases in two tranches, but be clear about this.
The gap between the salary a startup can pay, and what the same employee could earn at a larger company, diminishes with scale. It can be huge at seed-stage, when you are much more cash-constrained. After Series A, it narrows, to maybe 15–25% discount (depending on your equity grant, location, size of fundraise, and scarcity of the role, for example).
This gap typically drops to an average 0–10% after Series B, as the upside potential of your equity diminishes, and as the talent pools you are targeting get closer to those of larger, scaled-up, companies. You need to pay-to-play, and by this point, you have more financial flexibility to make competitive cash offers.
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