What Are The 5 Rules You Should Follow To Determine Your Startup Team’s Salaries?
“Sounds a little rich to me,” one of my investors, “Raul”, said to me when he asked me what I was going to pay myself as CEO. We had just closed $12M in Series A funding, and the salary I suggested paying myself was the median for a Series A CEO in our industry with that level of funding.
No, it wasn’t anywhere near $1M per year. And no I didn’t adjust my salary because of Raul’s protests. The truth is I could have told Raul a ridiculously low number and he would have said that was too high. That was just the way Raul was wired.
The reality is you’re on your own when it comes to determining what salaries you should pay yourself and your team. Here are five basic rules you should follow when you’re thinking about salaries for you and your team:
Rule Number 1 For Startup Salaries: You want your funding to last at least 18 months.
Why is 18 months the minimum you want your funding to last is really simple. If your funding only lasts 12 months or less, then you will be in constant fundraising mode.
Worse yet, you might not accomplish enough if your funding dries up too soon to justify more investment. That’s why, as a rule of thumb, you want you funding to last at least 18 months to 24 months.
So you can do the math and determine what salaries you can afford based on the 18 month rule. That leads to…
Rule Number 2 For Startup Salaries: You want your salaries to be at the median for any given position.
You’ve done the math, and based on the 18 month rule you have enough funding to pay your team market rate salaries. That’s great, and my recommendation is paying at the median for any given position.
You will end up with a team of mercenaries if you pay your team at the top end of the salary range. Because they are mercenaries, your team will move on when a better offer comes in.
And you will not be able to recruit the best if you pay under market when you can afford to pay at the market rate. Your team of B and C players will not be able to execute your plan.
That’s why you want to be center cut. You will be able to recruit a great team if you pay a fair salary, you have a generous stock option, have a great company culture, and you give your team exciting work.
That leads to…
Rule Number 3 For Startup Salaries: You want to be proactive about adjusting salaries.
For example, I had two managers, Dave and Shoba, that were doing great work, but they were underpaid. I could have waited and done nothing, but I decided to be proactive and adjust their salaries to where they should have been based on the market.
I wish I could say this was my great invention, but it wasn’t. I was following the rules set out in Netflix’s culture manifesto. Read it because it is a great blueprint for how to manage your startup.
That leads to…
Rule Number 4 For Startup Salaries: You should never overpay for that one person that will supposedly put you over the top.
Don’t think for a second that your team will not find out that you’ve overpaid this person. People talk, and word will eventually get out.
The rest of you team will resent your overpaid employee. That will make it harder for your overpaid employee to succeed.
And hiring someone at the top end of your salary range will hurt the salary structure for the rest of the team. I’ve seen this play out. You will likely have a lot of other employees asking for raises above market.
That lead to…
Rule Number 5 For Startup Salaries: Above all, be fair and consistent.
As I said, you have to assume your team is going to talk amongst themselves about what they are making. You have nothing to fear if you are fair and consistent in your approach.
However, it’s when you are all over the map that you will have problems. Inconsistency builds resentment.
You’ll never be perfect. That’s why it’s important to be proactive and correct any salary mistakes you’ve made (Rule Number 3). You’ll be way ahead of the game if you start out with a goal of fairness.
For more, read: How Much Equity Do Your Employees Deserve?