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 or her time recruiting key hires. Having a clear philosophy around compensation and rewards is essential to
do this effectively. Additionally, you can benefit 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 company’s overall mission
and values. For example, a company that identifies 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 company’s compensation philosophy is and how it aligns with the company’s overall values. The
people involved in making the offer and negotiating salary or equity should know all the steps and data points it takes to
arrive at the final offer. 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, it’s likely to lead to later adjustments and readjustments as you hire
more people. The internal inequities become more visible and it becomes harder to fix with each additional hire. The
sooner you think about compensation, specifically how you define your compensation philosophy, the stronger the position
you’ll be in to hire and retain the best talent in the market.

Every company needs a compensation philosophy that supports the company’s mission and values. Your compensation plan
should be able to attract, motivate and retain employees. You’re 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 different 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, you’ll want market data to ensure you’re making hires within the right salary bands.
It’s much easier to have a conversation with a candidate when you have market data vs. what you’ve 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. Let’s say you need to hire your first Sales Engineer in San
Francisco but you don’t know where to start in terms of figuring out how to pay this person. You can look up, by title, what
someone in this role makes and then refine further by any of the following: location, years of experience, education and
number of direct reports. The results will show different 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 different 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 manager’s
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.

Homebrew’s compensation philosophy

We have developed our own philosophy around compensation at Homebrew based on experiences at different 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 profitable business.
● We want to hire people that truly believe in the company’s 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 offer 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 won’t 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 find out what everyone else is making. We know your parents told you never to talk about money but
people do. Potential candidates find 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 employee’s compensation. This is a good way to sanity check every comp decision.
3. Revisit compensation only 1x per year (max 2x per year). Don’t 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 company’s compensation philosophy. This is why it is so important that everyone involved
in the interview process fully understands the company’s philosophy and is comfortable selling it to all levels of
candidates. Don’t 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://firstround.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.
It’s important to balance the right amount of cash and equity in an offer so that 1) cash flow 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 find salary bands for an Engineering Manager from Advantage HR/Option Impact survey.
1097 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 $3 million, you’re looking at a base salary of $120K. This number gradually
increases as the amount of capital increases. Pretty simple.

A B C D E F G H I

1 Base Salary All >0-3M >3-10M >10-25M >25-50M >50-75M >75-100M >100-250M

2 # of 1097 87 172 106 172 115 206 206

companies

3
Average $166,428 $117,533 $134,009 $162,551 $170,316 $178,518 $179,338 $183,234

4 $115,000 70,000 $87,300 129,700 135,700 $150,000 150,000 $155,936

10th
5
25th $149,000 $166,428 $105,000 $143,650 $155,000 $160,000 $162,000 $165,000

6
50th $170,000 $120,000 $130,000 $160,000 $170,444 $176,375 $182,000 $180,073

7
75th $190,000 $150,000 $155,000 $180,000 $185,000 $192,365 $200,000 $198,569

8 90th $210,000 $166,000 $180,000 $200,000 $200,001 $213,400 $205,400 $210,000

We recommend targeting the 75th percentile for equity, which in the example equity bands below, equates to 1.36%
ownership in company (for a company that has raised from $0 to $3 million).

A B C D E F G H

1 % Total Equity All >0-3M >3-10M >10-25M >25-50M >50-75M >75-100M

2
Average 0.275% 1.174% 0.587% 0.256% 0.163% 0.167% 0.132%

3 10th 0.018% 0.127% 0.102% 0.050% 0.036% 0.027% 0.024%

 3 10th 0.018%  0.127% 0.102% 0.050% 0.036% 0.027%  0.024%

4 0.041% 0.245% 0.184% 0.093% 0.064% 0.047% 0.039%

25th
5
50th 0.104%  0.571%  0.345%  0.199%  0.108%  0.094%  0.074%

6
75th 0.253% 1.360% 0.798% 0.339% 0.189% 0.187% 0.164%

7 90th  0.623%  3.559%  1.000%  0.544%  0.354%  0.300% 0.291%

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 profitable business. Additional equity grants
(sometimes called refresher grants) should be based on performance and not awarded until an employee’s 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 defined philosophy around compensation and equity upfront. Be consistent and do not be afraid
to enforce this policy.

Source: Advanced-HR - Option Impact, 2020 VCECS Status

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

A great resource on equity compensation is the Holloway Guide to Equity Compensation . This is the first of many guides to
be published by Andy Sparks and contributors.

I’m 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 finances. Being a founder is hard enough without additional stress about
your home life. Free yourself from having to think about your finances so you can be a happier, more productive founder.

I’m 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, you’re 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 isn’t
unusual. And remember that you likely have significantly more equity compensation. Your salary can always be adjusted at
a later stage, but it’s 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 offers but more difficult when you grow and have more people touching the offer
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 effectively.
If you want to have a level playing field, 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 offer stage that
certain parts of the offer (base, bonus) are not negotiable, if that is your policy. Problems arise when there’s no clear policy.

Because it can be difficult to value equity in an early stage company, Homebrew often recommends presenting two
different offers to a candidate. This asks the person to make a clear choice about his or her compensation preference.
For example:
Offer A) Base Salary: 125K Equity: 1.25%
Offer B) Base Salary: 200K Equity: .75%

Offer 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. Offer B will be for the more conservative candidate who can not take a cash cut in the near term. Assuming you are
managing the candidate’s 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 offer.

Compensation Resources:

● AdvancedHR - https://www.advanced-hr.com
● http://firstround.com/review/The-Right-Way-to-Grant-Equity-to-Your-Employees/
● https://www.indexventures.com/optionplan#expected_funding_rounds_pre_exit=series-b-and-
c&employee_country=us&mode=seed

The Offer Process - Timing

There are different schools of thought around what works best. Verbal offer, written offer, when and who should make the
offer? Let’s make it simple.

● Founder makes verbal offer 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 offer.
● 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 offer letter/employment letter.
● Candidate gives notice at current company..

Homebrew recommends coming to a verbal agreement prior to putting together a written offer letter. You’ll save time and
energy going back and forth revising written documents. The terms of the offer 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 offer and potentially changing
one’s mind (worst case scenario). It also leaves room and time for getting poached by another employer.

What if there is a significant 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 don’t recommend you try
to talk them out of this time. We believe people need time off 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, it’s 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 reconfirm start time and share a high level overview of what the first
day/week will look like.

Who should give the offer? 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 offer. This typically becomes the role of the
internal recruiter or HR manager. Although it may be difficult 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

You’ve made a great offer. Now what? There are many things you can do (and not do) between the time you make a formal
offer 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 candidate’s confidentiality 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 candidate’s confidentiality. Look at your own network and leverage your investor’s 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, figure 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 offer letter and a start date

A candidate should have a finite amount of time to review the offer 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 figure 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 firm 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 it’s 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 confidence to make a leap of faith.

Send a personalized gift to the candidate and or family

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

Offer 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 doesn’t hurt to offer 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 offer 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 offer is significantly lower than a competitive offer, this may not be the
right fit for the candidate. You don’t want someone coming in and being stressed out about a financial 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 fit, do not hire. You learn a lot about a candidate in the final
negotiation phase and if it is starting to not feel right, most likely, it’s not.

DON’Ts

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 candidate’s 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 person’s candidacy with others. Even if the candidate
is not in a job, you don’t want to bring attention to this candidate because this could jeopardize you closing him or her.
Don’t make an assumption you have closed the candidate until he or she has signed the offer 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 offer 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-offer 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-offer. Second, decide in advance if there's any higher you'd go in your offer to confirm the candidate. That way
once the candidate comes back to you with a firm counter, you won't make an emotional decision but rather know your
compensation boundaries in advance.
The Offer Letter
Your company should have a simple template for an employment offer letter. If you don’t, here is an offer template . Make
sure to have outside counsel review your template prior to sending to any candidates. eShares has a model for explaining
equity, benefits, and reporting structure in a very detailed offer. They make it very easy for the candidate to understand
all the components of the offer 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 significant 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/profile

Related Articles
The Complete Guide to Understanding Equity Compensation at Tech Companies
Paying Star Employees Well Is a Good Strategy Innovation
Creating a Compensation Plan for Start up Success
http://firstround.com/review/counterintuitive-comp-tips-for-the-unwary-and-uninitiated/
Triplebyte offers some great ways to close engineers in this blog.
Opening up about comp isn't easy ... Here's how to get more transparent
Counterintuitive comp tips for the unwary and uninitiated
Please feel free to reach out to Homebrew’s Head of talent beth@homebrew.co with any questions.
https://www.codingvc.com/analyzing-angellist-job-postings-part-2-salary-and-equity-benchmarks
https://bowerycap.com/blog/talent/founder-refresh-grants/
https://medium.com/@foundercollective/an-intro-to-employee-stock-option-plans-esops-for-startup-founders-
e6bb07bcb6e3

Homebrew Guides
Immigration 101 - Immigration 101
https://quip.com/wuTHAU3kmiKh - The Process for Sourcing Talent
https://quip.com/WaWoAwlLONGy - Policy against Discrimination, Harassment, Bullying & Retaliation
https://quip.com/T9H4AUVNKTDR - Human Resources Policy at Startups
https://quip.com/MwcgA10sGgFC - Performance Management at Startups
https://quip.com/h3efABIaaG4y - Onboarding at Startups
https://quip.com/BGenAiTcbxGo - Benefits at Startups
https://quip.com/7GSaAovqAPEh - Diversity at Startups
Diversity 2.0
How to Evaluate a Resume

Updated 2.27.20