When your startup is strapped for cash and focused on growth, compensation can feel like a puzzle. But how you pay yourself and your team sends a signal - to investors, regulators, and employees. Done wrong, it can cause legal headaches, tax issues, and cultural tension. Here's how to navigate early-stage compensation the smart way.
Pay Yourself, But Be Realistic
Founders deserve to be paid - but not at the expense of your company’s survival.
Early stages: Modest salaries or deferred comp are common. You want to stretch the runway while recognizing your time has value.
Post-funding: Investors usually expect founders to take a market-rate salary (or close to it). It shows commitment and helps with personal sustainability.
Mistakes to avoid:
- Paying yourself too much before the company has revenue.
- Paying nothing at all and relying solely on equity (IRS and employment law issues can arise).
- Failing to document founder compensation formally.
Compensating Employees: Cash + Equity
Startups often can’t match big company salaries - but they can offer upside.
Cash: Pay at or slightly below market with a clear path to increase as the company grows.
Equity: Stock options or RSUs give employees skin in the game. Just make sure you:
- Use proper equity documents (Option Grant Agreements, 409A valuation, etc.)
- Explain vesting clearly - 4 years with a 1-year cliff is standard
- Have a written equity plan in place (consult counsel)
Mistakes to avoid:
- Making verbal promises about equity
- Offering equity without board approval or plan compliance
- Ignoring tax consequences for employees
Use Offer Letters and Contracts
All compensation terms should be spelled out in writing. Your offer letter should include:
- Salary and payment frequency
- Bonus structure, if any
- Equity grants and vesting
- Benefits and perks
- Employment classification and at-will language
This reduces misunderstandings - and protects you legally.
Final Thoughts
Compensation is more than a paycheck - it's a core part of your startup’s legal and financial foundation. Treat it seriously, stay compliant, and keep your cap table clean. When in doubt, get legal advice early.
Frequently Asked Questions
FAQs
Should founders take a salary in the early stages?
Yes, but it should be modest. Paying yourself something demonstrates value for your time, but it shouldn’t jeopardize the company’s survival.
What’s the standard vesting schedule for startup equity?
Most startups use a 4-year vesting schedule with a 1-year cliff to ensure commitment and retention.
Do equity grants need formal documentation?
Absolutely. Grants should be approved by the board, backed by a 409A valuation, and issued through a written equity plan.
Why are offer letters important in startups?
They clarify compensation, benefits, and employment terms, reducing the risk of disputes and protecting the company legally.
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