In the early, pre-funded days of a startup, founders often do all the work without explicit compensation. Once they raise some funding, and need to bring on new team members, they will need to figure out how to pay them.
There are two parts to a compensation package: Cash and stock (usually in the form of stock options) Generally, it is a good idea to figure out what is the fair market value for an employee and try to pay them market rates.
Stock options are confusing for founders and employees, especially those new to the startup space. Joshua Reeves, the CEO of Gusto the payroll company, has put together a fantastic guide to equity for employees. This is also useful for founders who are thinking through their option plan.
Here are some benchmarks for cash and equity compensation for your reference. In 2018, it is very much a job seeker's market - tech talent is very tight and know that you are going to have to sell your employee to come work for you, because most great candidates have options.
There is a LOT of stuff out there and it is not all self consistent. The important thing is to survey all of it, take it in as data - and then you can make an informed decision on what you can offer, and why.
Formulas and heuristics:
- How JoelOnSoftware of FogBugz thinks about compensation (including Profit Sharing).
- Fred Wilson, a New York VC, has a formula for how to calculate equity based on the pay you are offering. This couples salary with equity which is good and bad - on one hand, you cannot look at the two numbers independently. On the other hand, you probably shouldn't - because both are part of the compensation package.
- In the spirit of radical transparency, Bufferapp publishes the formula they use to calculate pay - and list the actual amounts for key employees.
- BufferApp also shares their formula for granting employee stock options.
- Talk to your friends who work at tech giants to get a handle on what you are competing against. They may or may not be willing to share... but you are ALWAYS competing with Google. It will help you adopt the right attitude when selling your candidate on the vision, the promise, and the allure of being part of a core team to build something fabulous from nothing - as opposed to being part of a massive talent pool and not really being recognized.
- Then do some comparables research on salary.com and on glassdoor.com - look for comparable roles in comparable companies - because that is what your candidates will be doing. Better yet: What is your specific candidate looking at for options? Look up the kinds of companies they may apply to / are applying to, so you know what you are up against.
- For senior executives, Ernst and Young publishes an annual executive compensation study. The 2013 basic results may be found here. You may want to dig around to see if there is a webinar or some such hosted by Wilmer Hale, Park Square and Ernst and Young that presents the latest data from more recent years.
- Angellist maintains a startup salary and equity tool organized by role and geography. Find the closest role to what you are hiring for, pick your city, and see what people are offering in your area.
- Robert Half, a recruitment agency based in Las Vegas, publishes a salary guide for technology professionals every year. This is more appropriate for well funded startups at or beyond the A-round stage.
- If you are looking for advisors to devote significant time to your startup, you may want to consider offering equity. Here is a Techcrunch article on offering equity to startup advisors with some guidelines on how much to offer for the level of engagement you are looking for, segmented by stage of the startup.