What are some common mistakes that you’ve seen founders make around compensation?
Dominic Jacquesson, VP of Insight & Talent at Index Ventures: Quite often founders are tempted to make exceptions to their own hiring rules because they’re desperate to close on a candidate. They’ve invested a lot of time, and have built a lot of conviction around them. As a result, they might end up making an offer that is higher than what they’ve offered other existing team members in similar roles. Finding great people is brutally tough, so this issue comes up a lot. I recommend establishing pay ranges for specific roles, for both cash and equity, which gives yourself room for maneuver, but also keeps you honest. If you still find yourself struggling to close a candidate you are convinced that you need, ask yourself if you are paying your existing team members enough. If not, you’re going to keep having the same problem, and the likelihood is that word gets around, creating tension and resentment in your team.
Equity is often calculated on a percentage of salary basis. Technical roles might get 60% of salary, and non-technical roles 30%. But because teams tend to reflect wider biases in the world, technical teams are often majority-male, whilst non-technical teams are likely to be more balanced, or indeed majority-female . An outcome of the % of salary basis for equity is that the technical team members end up not only with higher salaries, but even higher equity allocations. That sort of disparity might not fit right with the culture you are trying to create, and indeed can lead to tension in the company. You might want to consider a consistent way of structuring equity for all employees, such as calculating it as a percentage of salary.
Another issue that tends to happen with solo founders is they want to bring on an experienced entrepreneur with specific complementary skills. It’s too late to offer equity (versus stock options), or to be considered a co-founder. If you’re in this position, it might drive you to offer them a very large option grant (draining your employee stock ownership plan, or ESOP) and paying higher cash compensation than you can afford. The underlying issue in these instances is that you didn’t have the right co-founding team to start with. Your founding team needs to encompass the core skills you need to get the company going; it gets very expensive to make big hires to the senior team later on. This situation most commonly arises if you have a non-technical solo founder (e.g. in a direct-to-consumer, or DTC, business), who realizes they need a strong technical lead, and/or a strong manufacturing or supply chain lead.
- 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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