The question of how to compensate early employees comes up in almost every single company in which I’ve invested. Total comp? Salary/Equity Mix? Even whether to use options or restricted stock? There is a lot of information available on most of those topics but I’ll tackle the “cash vs. equity” question in this post.
Compensation questions are very hard to answer in a vacuum. You need to understand many factors that include things like general demand for the role, local marketplace economics, the Company’s hiring plan over subsequent 12-18 months, how much existing employees are compensated (they will talk to each other) as well as how much total equity is available for compensating employees.
Also, each individual has very different needs (cash v equity). I like to understand their personal requirements generally in advance. This informs a range for the cash component. Then I like to signal that range verbally and assuming I get a “nod of approval,” make an offer with two options listed: Option 1) higher salary and lower equity and Option 2) lower salary and higher equity. Everyone likes to have a choice. And you can get a better feel for what type of person you are dealing with — at a very early stage (when “Cash is King”) we definitely want people who are more interested in the value of the equity (and so that also helps us conserve cash).
That would look something like this (We’ll use general numbers here to illustrate the thought process.):
Option 1. $105,000 and Options equating to .3%
Option 2. $120,000 and Options equating to .2%.
Know that in addition to appreciating the ability to make a choice, everyone also likes to win something in the negotiation of a deal. Which means you should be prepared to end up somewhere along the continuum (i.e. a little closer to top end of both cash and equity.
Once you’re close to a Series A, I’d also suggest that you stop talking in terms of %s of the Company except with only the most senior hires.
Probably the most important advice I give to Founders is that the expense of a few thousands dollars spread over a year of compensation is much less important that getting a very happy key employee who is excited about the deal and leaning in on day one.
Moonshots Capital is a military veteran-founded venture capital firm that invests in early-stage startups with extraordinary leaders.
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