It’s undeniable that building a team at an early stage is difficult – especially for startups with little money.
Often founders are quick to get hired for the first time, focusing on getting the process done and moving on to the next task, without taking the time to find the right person.
But this is a file Error. As a founder, your first 10 employees are the building blocks of the company—the people you trust the most and who you hope will stick around for the long haul—so it’s important to get early hires right.
Part of attracting high-quality talent includes offering a competitive salary and compensation package. But what should you pay your first employees, especially when resources are scarce?
What should you pay your first employees?
There is no industry standard for what tech startups should pay their first employees, because there are so many variables that affect who should get paid and what, says Alex Lewis, seed-stage European talent manager at Seedcamp.
“If you were a bootstrap, the salaries you offer would be different than a well-funded initial startup,” he explains. Other things that come into play include the company’s industry sector, the experience of the person you hire and the type of role you’re hiring for—”for example, if you need a software engineer from an e-commerce background versus a deeptech background.” In some cases, your location It can also play a role when determining salaries.
Lewis says a good starting point for determining pay is to use salary criteria – such as outta And the Numbers – that gives you the average salary for each role. “Then you’ll need to dig a little bit more deeply into the market you’re in, and the seniority and experience you need,” he adds.
One way to do this is to talk to other founders within your sub-sector who run a company of the same size and ask what they pay their first employees. How much you pay your top ten team members also depends on the type of business you run, the roles you ask for — and how much cash you have in the bank.
Dennis Muller, The founder of the productivity app Amie, which he launched in 2020, says his first 10 employees were designers and software engineers, initially paid between €66,000 and €75,000.
Technical roles, such as front-end and back-end developers and software engineers, are usually the most expensive To recruit, says Emilia Thi, co-founder of Clare & Me, an AI-based mental health startup that offers psychotherapy support through an app.
Her Berlin-based company currently has 10 employees, whose wages are divided into two tranches: those in technical positions earn higher wages according to industry standards of 50-70 thousand, while other positions earn slightly less.
Individual wages will depend on the employee’s level of seniority. In Berlin, for example, a junior software engineer earns about 55 thousand euros, while a senior software engineer earns about 75 thousand euros, according to data from global venture capital firm Antler.
No need to pay big bucks
Lewis and Alan Bunsen of Seedcamp, a partner at Antler, say early-stage startups shouldn’t focus on trying to get top-tier talent, because the truth is that most startups can’t pay the salaries offered by the big companies. Poensgen says that employees of start-up companies should expect to accept a salary between 30 and 40% less than the salary typically offered by a larger company.
“In the very early stages of a startup, you can’t pay for experience, but you don’t necessarily need to. At Antler, we often advise our founders to prioritize talent and potential over experience when they first hire,” says Poensgen.
“It often pays to … to have a truly exceptional junior general specialist rather than competing with consulting or increasing the salaries of experienced staff”
“It often pays to … get a really exceptional junior generalist rather than competing with consulting or increasing the salaries of experienced staff,” he adds.
There are other ways in which startups can make up for salaries that may be below market level – for example, through attractive benefit packages.
Lewis says that flexible utility platforms such as Peppy or Juno, which provides employees with the ability to choose their own benefits, is a great way to attract talent. A stock offering is another way early stage startups attract talent.
“Giving early employees a piece of the pie will give them approval from the start, because you provide them with a long-term incentive to stay within the company,” Lewis says.
When employees apply to a startup, they often choose between a combination of salary and option packages. For example, file Cucumber It could be a salary of between £30,000 plus 5,000 options, or a £33,000 salary and 3,000 options.
Here are some of the basic things you need to know when considering offering employee equity.
The difference between offering stock and offering options
Giving employees stock means letting them do it Immediately You become a shareholder in the corporation, with all voting rights and other shareholder rights that they entail.
However, giving individual choices gives them the right to do so shopping Stocks in the future – sometimes at a discount, if The options were set when the startup had a lower rating. The rights attached to these shares can then only be accessed after they have been purchased by the individual. This is the most common way to give employees fairness in a business.
What is the pool of options?
The options pool is the total amount of equity (a percentage of the company’s total stock) that you allocate to employee options. How you customize options for your employees will vary depending on the size of your choice pool.
Why should you give stock to early stage employees?
- It is an effective way to attract the best talent when you are not in a position to offer big salaries.
- It’s motivating for employees: they want to work to build a successful company with the promise of rewarding their efforts in the future.
- Employee rights systems such as EMI (Enterprise Management Incentives) Provides significant tax benefits to companies and their employees and encourages employees for long-term commitment.
- It provides a long-term incentive for employees to stay with the company.
How much equity should be available to your first employees?
Clare & me split 10% of its pool of options for employees, and each person gets a different percentage of these options based on their value in the company and their level of seniority.
“What you allocate for changes as you grow is because, for example, a team member might leave, so they then have to bring back the options. Or, you can take a new funding round and the investor will tell you that 10% of the employees’ equity is too little, and you have to give them 15 %,” explains Clare & me’s Thee.
Swedish fintech company Treyd.io does it a little differently. It does not have an options pool, but the equity is set based on a percentage of the employee’s annual salary, and the company’s valuation in the last round – employee options will grow as the company transitions through the funding stages. The startup’s founders set aside 15% of equity for all employees as the company matured – so far 7% has been given to its 46 employees.
“Giving early employees a slice of the pie will give them the opportunity to buy from the start, because you provide them with a long-term incentive to stay within the company.”
Index Ventures also has a file stock measuring tool To help companies assess how much stock they should give employees, based on company size, stage, and geographic location.
The amount of capital you choose to give to employees will also ultimately depend on your cash flow. Typically, early-stage companies that can’t pay big salaries are compensated with higher options for early employees.
UK VC Balderton recommends giving the first 10 employees 1% of their total equity – an already common practice in the US.
Amy’s Mueller says he assigned his first 10 employees 1% equity because he thought “this was fair” given that they “joined the company early and may have taken some risks.”
Once startups have more than 50 employees, they typically start offering employee stock ownership plans (commonly referred to as ESOP). This is a more standard way of giving equity to the business as it grows, moving away from the individual allocation that employees might get when they join a company early on.
How should equity be divided among your team?
The typical approach is to offer stock based on the employee’s seniority.
Balderton gives the following guidelines, relevant to early and middle stage businesses.
How do employee options change over time?
The pool of employee options is not fixed, and can change based on the company’s hiring plans, as well as funding rounds.
Of the total equity allocated to the ESOP, companies will typically allocate between 3.1% and 7.1% to employees up to Class B, and hold up to 3.9% unallocated (the shares not currently allocated to any ESOP participant at a given time).