Compensation can be tricky. While not every candidate stack ranks compensation in the same way, it is an important factor for nearly everyone. At the end of the day, we all want to feel like we are valued and compensated fairly.
The stakes are high. Framing compensation well will win you lots of points with your candidate, and may even be the deciding factor. Framing compensation poorly can leave a candidate with a sour taste in their mouth and cause damage beyond repair.
This section will cover 4 best practices that will simplify things for both you and your candidates:
- Align on a compensation philosophy
- Use a comp dataset to make your offers
- Build a talk track for framing your offers to candidates
- Know what your levers are for negotiation
A “compensation philosophy” is a stance on compensation that explains the “why” and creates a framework for consistency. At Gem, we aligned on a compensation philosophy early on. Given the caliber of team we were trying to build, we decided that we should anchor above market on cash (~60th percentile) and go above and beyond for equity (~60-75th percentile).
Picking a compensation philosophy is up to you and your co-founders and may depend on how much you’ve raised:
- Some startups that value running lean may choose to pay below-market on cash and above-market on equity.
- Others that have raised a big round may choose to pay above-market on cash, but grant less equity.
Keep in mind that your compensation philosophy may determine the types of candidates you have access to and should evolve over time as the market changes and your startup evolves. The important thing is to be consistent and have a sensible reason for why. This makes it a lot easier to explain your offer to candidates in a way they can understand.
Personally, I recommend being generous with equity, especially with your early-stage hires. From the candidate’s perspective, joining an early-stage startup is super risky, so you probably won’t be able to hire the right talent if you aren’t willing to be generous with equity. As a founder, one way to think about it is that startups are pretty binary — either you succeed or you fail. If you fail, everyone’s equity goes to zero. If you succeed, everyone’s equity is going to be worth a lot, and you won’t regret having given more equity to your early-stage team.
Using Option Impact to make an offer
Once you’re aligned on a compensation philosophy, you’ll want to use a comp dataset to make an offer. At Gem, we used Option Impact.
Option Impact is a free startup compensation dataset. To gain access to Option Impact, you have to self-report cash and equity compensation for each of your employees by filling out a survey every 6 months. Unfortunately, they don’t allow you to fill out the survey out-of-band, so there can be up to a 6-month lag-time to gain access. For that reason, get connected with Option Impact (e.g. through your VC) immediately, so you can participate in their next survey. In the meantime, most VCs should have access to Option Impact, so you can ask them to pull the data for you. If not, try to find another founder who has access.
Option Impact allows you to pull compensation data specific to attributes of your candidate (e.g. title, job level) and your startup (e.g. funding status, industry, location, etc.).
You should always filter by a consistent set of attributes for your startup. For example:
- Location = SF Bay Area
- Industry = All Industries
- Founding Status = Non-Founders
- Group Data By = Funding Round → Seed Funding Only
Then, pick the job family that best represents the person you’re hiring (e.g. “Software Development & Engineering” or “Sales”). From there, Option Impact will provide a table with levels (1-6, manager, director, VP, CXO). Do your best to map someone’s experience to the Option Impact level codes and then map their cash comp and equity to a percentile based on your compensation philosophy.
Some roles will have both Base Salary and Incentive Pay (e.g. sales commissions or customer success bonuses). For that reason, you should probably look at the Total Target Pay (“TTP”) column, which adds up base salary and incentive pay. For equity, look at % Total Equity, which is how you should be benchmarking and explaining equity to candidates. After all, every startup will have a different number of shares outstanding, so % Total Equity is the only thing that matters.
Explaining comp to candidates
Having a consistent compensation philosophy makes it easy to explain comp to candidates. I’d recommend leading with transparency.
Our talk track went like this:
- We’re trying to build the best team out there, so we’ve decided to be generous on comp.
- Our comp philosophy is to anchor above market on cash for Bay Area Seed stage startups (50-60th percentile). We understand that SF can be an expensive place to live and we want to make sure everyone can live comfortably.
- For equity, we’ve decided to go above and beyond what’s normal (60-75th percentile). We think there’s an opportunity to build an enduring company in this space. At the end of the day, we want everyone to feel really invested in Gem and aligned with our long-term success. With that said, we acknowledge that joining a startup can be risky and the risk/reward tradeoff for early-stage employees is often unfair. We’ve decided to do something pretty different at Gem.
- Given our comp philosophy, we have a fair and equitable process for making offers, which is to pull comp data for YOUR ROLE with YOUR LEVEL OF EXPERIENCE for Bay Area, Seed-Stage Startups. We pick 50-60th percentile on cash and 60-75th percentile on equity.
- With that in mind, we’re excited to offer you $X salary and Y% equity, which we think is a really generous offer.
- We really encourage you to do your own research and find data points for seed-stage startups to see for yourself whether our offer is fair. And if you’re seeing something different, let us know!
I’d also recommend taking a transparent approach to explaining equity % ownership. Try to figure out how much your candidate understands about equity.
- Have they worked at a startup before? Do they understand how options work? Do they understand dilution? Liquidity? Do they understand 409A price vs preferred price?
- If they don’t have a great understanding of equity, you can educate, which builds trust.
- If they’re savvy, a lack of transparency is fatal, because the candidate may think you’re trying to hide something.
We got consistent feedback from candidates that our offer felt fair and that we were way more transparent than any other company. Nailing the offer was one more reason for candidates to team up with us.
Pro tip: if a candidate’s expectations are very out-of-line with your offer, you can even pull up the Option Impact data and show them. I wouldn’t do this for every candidate as there’s a risk they latch onto something small about the data that doesn’t matter.
To negotiate or not
Hopefully, you’ve done a good job of qualifying candidates early and aligning on compensation expectations, and either filtered out candidates who would have never accepted your offer in the first place, or reset comp expectations. Still, many candidates will try to negotiate.
There are two trains of thought on early-stage hiring & negotiation. Some will advocate that you should do whatever’s possible to get your first few hires in the door. After all, if you can’t hire a strong early-stage team, you’ll almost certainly fail. At Gem, we chose not to leave much room for negotiation, which simplified our closing process and increased our close rate.
When candidates asked if there was room for negotiation, we would respond with something like:
- We have a compensation philosophy that makes our offers consistent (and transparent).
- We want to be fair to everyone we’ve hired so far, so unfortunately, we don’t have much room for negotiation.
- It’s important that we’re thoughtful about our offers and don’t do anything too out-of-band so we can continue to make generous offers to future candidates that come after you. After all, we all want to work with the best people possible.
- From your perspective, this is a good thing, because it gives you peace of mind that candidates after you won’t receive a better offer just because they were a better negotiator.
Of course, this only worked because we had a consistent / transparent process for making offers. And the offers themselves were in fact above market on cash and above & beyond on equity. If you choose to be stingy with equity, or inconsistent / not transparent with how you arrived at your offer, you won’t have much ground to stand on when you say you don’t negotiate, so this playbook probably isn’t for you.
With that said, there were a few exceptions to this rule:
- In one case, we found that compensation for one of our roles was slightly under-market. In this case, we decided to do the fair thing and adjust our candidate’s offer and everyone we had hired to-date for the same role.
- In rare cases, we used a small signing bonus to bridge the gap between a competitive offer.
Still, there may be specialized roles or leadership roles where you have to negotiate or maybe you prefer to negotiate across the board.
If so, here are a few best practices:
- As a reminder, only negotiate compensation once your candidate is ready.
- Anchor lower on both base and equity, so you have room to come up.
- Uncover what’s most important to each candidate (cash vs. equity), so any adjustments to compensation are along the dimension the candidate values most.
- Consider trading equity for cash or vice versa rather than just increasing one or both.
- Whenever possible, get your candidate to verbalize that they will accept your offer if you’re able to adjust their offer… “assuming we can get close to this, are you ready to sign?”
- Know your levers for negotiation before starting the conversation — e.g. your ceiling on cash, ceiling on equity, whether you’re willing to trade cash for equity, and at what rate.
- If your candidate asks for something out of band, never commit to it on the spot. Have a reason for being noncommittal (e.g. aligning with your co-founder or the board).
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