You can't pay for groceries with equity
You’re not going to compete on salary with Google and Facebook but you need to get survival out of mind. Even your earliest hires ‐ and that includes you, the founder ‐ will need to pay bills. Some startups go to extremes, trying to make their runway last longer. Don’t build your runway on the backs of an exhausted and underpaid team. You objective is not to delay the next round but to get to it in the best possible shape. Here’s a few things you can do to achieve the right balance.
The power of perks
You’re not going to have the swankiest offices but you can make them reflect why people came to work for you. You don’t need a big budget to create a friendly, informal and energetic work space. Our environment helps to shape our mindset and reminds us who we are. Spend the time to make it attractive to your team, even if you can’t initially spend much money.
PRO TIP: Buffer’s focus on transparency led to their Open Salaries initiative has created huge buzz and awareness of them.
Perks are powerful and cost effective. When you take into account tax and deductions a $10 lunch is worth more to your employee than $10 on their salary. But it’s about more than a free lunch. Taking care of peoples’ needs makes them feel taken care of. This pays off handsomely in productivity and morale. That shouldn’t mean that you neglect traditional benefits. Before you start on the ping pong tables and games consoles make sure everyone has access to health insurance. When people know the basics like health are covered they’re more prepared to live leaner when it comes to salaries.
Equity compensates risk. It is a form of deferred reward. When deciding whether to join your startup a prospect is looking at what they could earn at market rates for their skills over the same time period and balancing it against a potential future return that should be several multiples of the income they lost out on. It’s mathematics. All early employees should have a significant amount of equity. This ensures their sense of ownership and mission. A properly structured stock option is also a commitment on the part of the employee. Equity grants usually vest over a period of three to four years and there’s a “cliff period” (typically one year) before a new employee earns their first tranche of shares. This way, you’re not giving your company away, instead you’re binding the core team to your mission for long enough to make meaningful progress. With that in mind, don’t wait till the best people are restless. The best companies also give retention equity packages to fully vested employees. You need to think about this, before your star performers do.
How to research market rates, equity standards
Knowing the going rate for salaries and equity is notoriously difficult. A good place to get a benchmark is Angel List (for startup equity and salaries) or Glassdoor (for market rates). Make sure to compare yourself to similar companies. For each hire, check what’s on offer for jobs they could take so you know what their other options look like. Especially when it comes to equity it’s always better to err on the generous side. Rather than being hung up over a 0.1% more or less, think about whether this employee will improve your chance of success by that amount. A good hire will make it worth your while.
PRO TIP: Wealthfront's Startup Compensation Tool is one of many benchmarks you can use.