Designing Startup Compensation Packages

For startups, smart financial decisions are crucial to building a strong business foundation. However, they face the added challenge of balancing limited cash flow with the need to recruit and hire great talent. So, how do they stay on budget and hire the best talent for building a sustainable business?

Employee compensation is a key lever for attracting talent. It also makes up a significant portion of startup budgets, leaving leaders with tough questions: Which roles need to be filled, and how should startup compensation packages be structured to attract top talent?

This guide covers information about startup salary structures, compensation packages, and equity offerings to help you find the right talent for your growing business.

What differentiates a startup’s compensation package?

Compensation packages for startups differ from those of established companies because they typically offer a lower base salary in exchange for equity compensation. An equity compensation package includes non-cash assets, like stock options, shares, or employee stock purchase plans, allowing employees to purchase company stock at a discounted rate.

Startup compensation packages are often customizable, with more negotiation between the startup and the prospective employee. In addition to salary and benefit negotiations, startups with minimal cash flow can negotiate equity benefits and other perks that larger corporations may not offer. A customizable compensation package that includes salary and equity attracts talent with a vested interest in the company’s successs. That level of commitment typically means healthy talent retention and significant employee efforts.

Key components of a startup compensation package

Compensation packages for startup companies should include the following components:

Base salary

Startup salary structures should align with the role, location, the startup’s development stage, and the candidate’s experience. Startups often offer lower base salaries in addition to equity benefits and gradually increase compensation to market rates as the company grows more established.

To ensure fair and equitable pay, startups can use salary benchmarking to compare their salaries to market rates. Fair pay is a decisive factor for prospective employees, and startups will need to offer competitive pay and benefits to attract talent. Tools like AngelList, Levels.fyi, and Option Impact provide data on startup compensation and resources to assist with benchmarking and startup planning.

Equity or stock options

Startup equity compensation is a non-cash incentive for employees invested in the company’s long-term success—and helps attract and retain quality talent. Common types of equity compensation include:

Stock options. Employees can purchase stock in the company at a discounted rate. Common types are incentive stock options (ISOs), which have tax advantages but more rules, and non-qualified stock options (NSOs), which don’t have tax advantages but are simpler to use.
Restricted stock units (RSUs). Companies grant shares in the company, which vest over a set time frame.
Performance shares. Employees are granted shares that are linked to the company’s performance. If the company meets its goals, employees get shares based on pre-set terms.
Stock appreciation rights (SARs). Employees can get cash based on the amount the company’s stock price appreciates.

Here are a few equity-related terms to familiarize yourself with as you build startup compensation packages:

Vesting schedule. The number of years an employee must stay at the company before they are entitled to agreed-upon equity. A common vesting schedule is four years with a one-year cliff, which means an employee must stay at least one year before any equity vests
Strike price. The agreed-upon price at which an employee can buy or sell an option
Exit scenario expectations. A strategy to help startups manage how a founding employee or investor will leave to help maximize company profits and minimize losses

Total compensation philosophy

A total compensation philosophy clearly outlines the company’s strategy for attracting and retaining talent through all forms of compensation (cash and equity). Transparency fosters trust and sets clear expectations for prospective employees, especially those unfamiliar with startup equity compensation. It should include details about startup salary structure, promotions, dilution, valuation, and equity refreshes.

How to build a compensation framework for your startup

Use these five steps to help create an attractive compensation package:

Step 1: Define your compensation philosophy to communicate your company’s approach to compensation, including salary, benefits, bonus structure, and equity.

Step 2: Define job roles and align compensation with employees’ roles to incentivize behaviors while meeting business goals. For example, an employee who brings in new business should be rewarded based on that rather than their client service skills.

Step 3: Establish compensation based on geography to best meet your startup’s needs and goals. (single global rate vs. location-based bands). Location-specific salaries should be based on factors like local market rates and cost of living. This will attract talent in various regions without creating gaps in pay equity.

Step 4: Create a repeatable offer template to streamline recruitment and hiring by providing a structured outline detailing salary, benefits, job title, equity, and start date. This simplifies the hiring process and establishes a transparent relationship with employees.

Step 5: Set regular review cycles to assess compensation packages to ensure they remain competitive and fair as your business and markets change.

Brief note on benefits

Employee benefits are critical to startup compensation packages, and typically include healthcare, paid time off, wellness and remote work stipends, and tuition reimbursement.

Challenges and considerations for startup compensation packages

Building a startup compensation package can present unique challenges due to limited resources. Employers must carefully balance cash flow with compensation to be a competitive pay startup that attracts the best talent. Here are factors to consider when conducting compensation planning:

Equity complexity. Equity compensation can be complex and challenging to understand, especially for employees new to startups. Clearly define equity in your total compensation philosophy, so they know what to expect and how to maximize their equity benefits.
Compliance. International companies must comply with various tax and employment laws to avoid penalties and violations and still attract talent.
Pay equity. Startups need a fair global compensation strategy to ensure compensation aligns with similar roles at other companies, regardless of factors like gender and ethnicity. This encourages workforce diversity and helps employees feel valued.
Market competition. As a startup, you’ll be competing with established companies that can offer attractive total compensation packages. Striking a balance between salary and attractive equity compensation will help you attract the best global talent.

How Velocity Global can help

Establishing a comprehensive startup compensation strategy will help you achieve your business goals. However, achieving that on an international scale is an entirely different animal. As an Employer of Record (EOR), the good news is that Velocity Global has the global market expertise to help you build competitive, location-specific compensation packages that attract top talent worldwide.

Velocity Global’s EOR solution ensures compliance with local labor and tax laws while giving guidance on building competitive compensation packages for global teams. We also help you manage benefits and payroll so you can focus on building your business.

With global expertise in 185+ countries, partnering with Velocity Global will give you the confidence and freedom to build your business and a thriving team.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

Share via:

Topic:

Payroll, Global Growth