What’s The Right Way To Compensate Your Startup Employees?

The days of expecting your employees to work only for equity are long, long gone.

Early stage employees have a gotten a lot smarter and a lot savvier than twenty years ago. Your employees have options including working for large established companies.

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That means your crappy offer to work for no salary will not cut it.

If you want to hire great people then your offer has to be better, yes better, than the competition. And the competition includes your large competitors.

Now this doesn’t mean you have to pay a higher salary than your established competition. It does mean your complete offer has to be better than the competition.

What does a better offer from a startup mean?

Let me give you a way of thinking about it.

Here are the components of what you can offer an employee to join your startup:

Salary + Stock + Job Value = Total Value of Job Offer

Here are the components of what your competitors can offer the same employee:

Salary + Stock + Job Value = Total Value of Job Offer

It’s exactly the same. So it’s obvious what you need to do:

Your Salary + Your Stock + Your Job Value > Their Salary + Their Stock + Their Job Value

If you set your employees salary to zero, then the stock you offer employees better be through the roof. And remember that the person you are making your offer has to put food on the table.

In other words, it’s pretty tough to be competitive, let alone better, through a stock only offer.

It’s also pretty tough to be competitive with a ridiculously low salary offer. The only people that can accept an offer that has little or no salary component are those people that have enough money to eat into their savings.

The reality is you’re not going to pay more in salary than an established competitor.

But it does mean you have to pay something reasonable to your early stage employees. What’s reasonable? Well, that’s as close as you can get to market rate.

If you’re bootstrapping, you might be well off market rate. That’s okay. Then the value an employee gives to the stock, and the value an employee gives to the job have to be off the charts.

This is why early stage employees get significantly more stock than later stage employees. However…

Offering your prospective employees equity will not solve all your problems.

Sadly, you’re going to come across the spreadsheet jockey’s. Let me introduce you to what a spreadsheet jockey is.

A spreadsheet jockey is the prospective employee that you are trying to steal from your larger competitor. The spreadsheet jockey will build a spreadsheet and put a value on the equity you give and a probability of that equity being worth something. It sounds logical, but (and it’s a big, big but) the spreadsheet jockey will always value the equity lower than leaving your larger competitor.

It always works this way. So you need one more thing to snare top talent…

You need to hire true believers and fanatics.

Here’s the thing. You can’t buy your way into hiring top talent because nonbelievers will put no value on your stock and no value on the job.

You’re not going to win over the great talent that doesn’t truly believe in your mission. However, you can win over the great talent that does believe in your mission.

Doing this is amazingly simple. Just give the great talent you find exciting work to do, pay them fairly, and give them a generous option package.

Again, I’m not saying you should overpay. I am saying be generous. Generosity, combined with a reputation for fairness along with exciting work is a winning formula to build a great team.

You need one more thing to attract top talent: You need a great story.

You can do everything I’m suggesting above, and you still may not be able to snag the top talent you want. The reason is likely the story you are telling isn’t sexy enough.

You’re always selling when you’re a startup CEO, and recruiting top talent is, make no mistake about, selling. You have to sell your vision and the exciting role your prospective employee will play in growing the company.

That’s the Job Value part of the equation “Salary + Stock + Job Value = Total Value of Job Offer.” If you get the salary right, the stock right, and your prospective employee understands the value of the job, then you’ve got a fighting chance of landing top talent.

For more, read: Why You Need Fanatical Cofounders

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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