When you can’t pay market rate...

A dollar is what I need!

There are two extremes you can hit when you compensate non-founder hires.

The first is underpaying and undervaluing a hire. That creates a bitter and toxic environment. ☠

The second is offering way more than you can afford, in terms of pay, equity, or structure—and that’s a good way to sink your startup. 🛳

Finding the middle ground means understanding market rates, recognizing how far below market you are, and then figuring out how you can adjust. This way, you offer compensation that makes sense for you and your hire, and you avoid both extremes.

First, sort out market rates for the role 📊 #

It’s true that most early-stage startups can’t pay market rates. But that doesn’t mean you can ignore them. These free tools will help you find average salaries for different roles and locations:

This spreadsheet that we created pulls in data from 3 different sources for different roles in Charleston (where we’re based) and models out how annual raises will impact salaries over time:

Beyond that, talk with other founders and ask what they’ve paid and offered. If you don’t know many founders, check out podcasts, like The Startup Chat, where entrepreneurs openly talk about their experiences.  💬 If you want to see what we pay ourselves we also regularly share our financials on our blog.

Then figure out how you can adjust compensation 📈 #

Title and responsibility 😎

Titles may look like “free” incentives, but these heavily influence how a hire thinks about their role and how future hires interact with them. Steli Efti and Hiten Shah argue this makes titles very expensive.

Don’t toss them around like confetti, but do realize the value of someone being a “founding team member.” That person is going to have the opportunity to shape and drive core strategies in a way they (presumably) wouldn’t have at larger companies. 💪

Equity 💰

Equity can be a powerful way to encourage high levels of ownership in your first hires. Offering equity can also help identify candidates who really believe in the company and the impact they can make there.

But here’s something you want to remember: It’s really difficult for employees to evaluate and compare equity offers. First Round Review recommends, “supply them with the numbers and enough information so they can estimate the low, medium and high outcomes based on public equivalents.” You want to tell them their share, but you also want to break down some hypothetical company sale prices (including if you fail) and what that could mean for them. 💸

As low as 0.3% isn’t uncommon for a Senior Engineer for post-series A startups in the Valley. But as much as 3% to 5% may also be fair. The exact percentage depends on a lot of factors, including the hire’s seniority level, how big you want your team to get, and how much equity (overall) you want to give away. Remember, equity isn’t just to attract this hire. It’s also to attract future hires, including co-founders you may want to offer way more equity. 👀

For more info, check out Gusto, this thorough guide by Joshua Levy on Github, and AngelList’s tool for equity comparisons. Work with an attorney and/or tax advisor as well, if you plan to build this option. 💼

“Benefits” 💫

Beyond title and equity, there are plenty of other benefits you can throw in to make a below-market rate more attractive:

  • Hardware packages

  • Insurance

  • Maternity or paternity leave

  • 401k matching

  • Generous vacation policy

  • Remote work

  • Mentorship or professional development

But make sure you can follow through with these. For example, understand the costs and paperwork involved with insurance before you promise it. Make sure you have enough revenue to match 401ks. And be careful you don’t say, “we’re working on such and such package,” and then never do it.

*Remember, if the hire is a good fit, they’re also going to be incentivized by your culture, mission, and strategy. Udi Nir, while he was VP of engineering at Instacart, said, “We’ve seen that by paying fairly, crafting an exciting role and conveying a compelling mission seals the deal. It’s not just about comp. If it is, you may not want that hire.”

Performance bonuses 🤔

In large companies, these can make up a sizable portion of a hire’s compensation. But in early-stage startups, they’re hard to manage and difficult to budget. They’re an option, of course, but it’s not your best bet for your first few hires.  

Whatever you offer, be really clear about it  📦 #

Compensation discussions are difficult and uncomfortable. After all, you’re dealing with both parties’ livelihoods—not to mention egos. 😅

You’re taking a risk in hiring someone, and they’re taking a risk in coming onboard. Reward their leap of faith with transparency and empathy. The best case scenario for both of you requires lots of trust, and you’re not going to build that by being vague, hiding numbers, or promising nonexistent benefits. When you compile your offer, make it easy to understand and take time to explain everything thoroughly.

You’ll pave the way for some extraordinary, resentment-free work if you do. 🚀