How do startups pay employees

Hall and Woodward give guaranteed income equivalents for founders who have various levels of risk aversion as measured by CRRA. Guaranteed income equivalents are the amount of money the founder would be willing to take annually instead of founding the company and hoping for a higher, risky payoff years later. Dustin Moskovitz has pointed out that the th employee at Facebook and dropbox both made more than the founders of billion-dollar companies. In hindsight being employee at Facebook was a great idea, but how would you know at the time?

Only a handful of VC funds seem to be able to pick winners with any amount of regularity, and even if this is due to skill instead of luck, the fact that the vast majority of experts whose full-time job is to choose winning startups repeatedly fail at this task should make us wary of assuming an engineer with minimal business understanding could succeed.

It goes without saying that you should investigate any prospective employer, and if you are considering working at a startup that due diligence process should include understanding their business model and chance of success, but it seems doubtful that you should expect massively above market returns.

I tell my prospective employees that compensation is approximately the same on expectation between big companies and small: a senior developer at Google will probably make about as much money as a senior developer at a startup. As with everything else about startups, there is no free lunch and you have to do your due diligence before joining a startup — many founders are running as fast as they can just to keep their company afloat, and have no time for helping their employees.

Nevertheless, stock options tend to motivate employees more than cash bonuses at the startup stage. The cocktail party crowd has romanticized stock options, and employees still find them appealing, even if they're unsure about their true value.

My advice is to avoid stock options and the legal costs of setting them up unless you genuinely believe they'll be valuable one day. It takes effort to set up a win-win situation for both intern and employer, however. It's important to remember that interns are not like part-time employees who are primarily interested in a paycheck: You can't expect to give them menial work for the duration of their internship.

One way to motivate interns is to ask them to list their learning objectives for the internship. Have monthly meetings with them to track how well they're doing on reaching these objectives. Then even doing menial work becomes tolerable if it's put in context. He founded CircleLending, which was acquired by Virgin. Jerry Reid. Entrepreneur Staff. At an earlier-stage company, you can almost certainly expect a lower base salary than the industry norm, regardless of your previous experience.

As the company matures, the salaries of all positions start to get closer and closer to market rate. Benefits at a startup are also largely dependent on stage. If good benefits are important to you, then an early-stage startup is likely the wrong place to work. However, as a startup grows, its employee benefits often become an extension of its culture and are used in all recruiting efforts.

Other startups may allow pets at the office, or offer gym and other discounts, catered lunches, generous vacation policies, or flexible remote-working options. Equity is often the most confusing and intriguing part of a compensation package at a startup.

Equity refers to ownership of the company, and this can be extremely valuable if the company ever sells or goes public learn more about startup fundraising here. Startups should avoid performance-based increases for the first couple years an employee is with the company. As an early employee, most of the value people should be getting is the increase in the value of their equity as the company grows. Giving people performance bumps will get complicated and potentially unfair fast.

But, the logic follows, if an increase is absolutely necessary, it should come in the form of equity — not base salary. If you decide to do equity increases, she suggests that startups determine a number of shares they want to pay out to everyone based on the current pool and valuation. This evaluation should take both their teamwork and individual work into account.

This is a good time to be honest and reflective. To give startups a framework to approach performance-based increases, Graham has created the following framework:. Given these repercussions, compensation should never be your first answer in this type of situation.

You should first try to think of other ways to reward people or make them feel special. If you are dead set on going this route, however, there are a couple solutions to consider:. It will become the new normal. Beware of shooting stars — junior people who turn into top performers. You might have to restrain yourself, but it will be better for the people themselves and the company in the long run.

This is a different animal altogether because you have to build in incentives that impact base salaries and equity. The basics of this approach include:.

Offering competitive base salary: The catch is that the salesperson needs to bring in the revenue to cover it and their benefits before they can receive any bonus, including commission. This makes hitting goals all the more compelling. To motivate reps toward the former, pay out more for cash upfront deals and less for the rest. This makes pulling in cash top of mind for everyone. For more from Lemkin, click here.

For all technical, marketing, operations and other roles, Graham says her system will create the same effect: Keeping people connected to the success of the overall company without worrying about whether they're being fairly compensated. Keep adding more levels as you increase headcount and people climb the ladder of performance over years at your company.

Add more rating categories so you can get more nuanced and precise about performance-based increases.