How To Work Out Compensation for Startup Team Members

Compensation is one of the trickiest things to get right in a startup. When you’re still in the idea stage or bootstrapping with limited cash flow, traditional salaries are often off the table.

That means equity and trust become your main currency. But, how do you decide who gets what? And how do you make sure early team members, especially those who aren’t officially co-founders, feel valued, fairly rewarded and motivated to stick around for the long haul?

This isn’t just about dividing up a pie – that would be a whole lot easier! It’s about setting the tone for your company culture, your working relationships and your long-term growth. If people don’t feel appreciated or clear on what they’re working toward, resentment can quietly build – even in a small, close-knit team. In fact, in some cases, especially in smaller teams. Conversely, getting it right can build loyalty, fuel momentum and make everyone feel like they’re truly part of something big.

So, how do you get it right? Well, there are a few important things to do and bear in mind.

 

Get Started with An Honest Conversation About Equity

 

When there are two or more co-founders, you need to talk openly – ideally before writing a single line of code – about how equity will be split. Equal splits are common, but not always fair. Ask yourselves:

• Who came up with the idea?
• Who’s putting in the most time?
• Who’s taking the biggest financial risk?
• Who’s bringing in key skills or networks?

Remember, equity is ownership. It’s not just a reward -it’s a long-term commitment. Make sure you all feel good about the agreement because it’s a lot harder to fix later. So, rather have the uncomfortable discussion now.

Also, put everything in writing – absolutely everything. A simple founder agreement and a vesting schedule (e.g. 4 years with a 1-year cliff, normally) can save major headaches down the line. You’ll thank yourself later.

 

Early Joiners: Not Founders, But Important Nonetheless

 

Some people join after the initial idea stage but still help shape the company. They’re not technically founders, but they’re more than just employees. So, how should they be compensated? There’s no easy answer to this one, and the case is most likely to be different from one case to the next.

This is where equity offers come in. You probably can’t pay full salaries yet, so offering a small slice of the company in exchange for lower pay – or in some cases, just sweat equity – makes the most sense. But, how much equity is fair?

There’s no one-size-fits-all answer, but here’s a rough guide:

• Very early team members (first 5 people): 0.5%-2%
• Senior hires or technical leads: 0.2%-1%
• Junior employees or advisors: 0.01%-0.1%

Again, use vesting schedules so people earn their equity over time. It protects the company and rewards long-term commitment.

 

 

Striking the Balance Between Salaries and Equity

 

If you’re pre-revenue or bootstrapped, you probably can’t afford market-rate salaries, and that’s normal in the early days. But be clear and upfront with your team about it. Transparency builds trust.

As funding comes in or revenue grows, try to gradually increase salaries. You don’t want talented people jumping ship because they can’t pay their rent. Ideally, equity is the long-term reward, but cash flow is king for most people, especially in a cost-of-living crisis.

A useful rule of thumb is that the less you can pay in salary, the more equity you should offer, and vice versa.

 

Make Use of Equity Tools or Frameworks

 

It helps to use tools like Option Pool calculators, equity templates (e.g. from Y Combinator or Carta), and standardised roles-based benchmarks to work out offers. These frameworks give you a reference point so you’re not just pulling numbers out of thin air (because that’s obviously not a good idea).

And remember to explain what the equity means. Most people don’t instinctively understand the difference between stock options, restricted stock units or vesting, so if they’re joining your startup, they deserve to know what they’re getting into.

 

Reassess Compensation As the Company Grows

 

Startups change fast. What’s fair in the first six months or year might not make sense in year three. Revisit your compensation structure regularly, especially after new funding rounds.

Consider the most important questions you should ask yourself at this point, including:

• Are salaries in line with your stage?
• Is your option pool big enough to attract future hires?
• Have roles changed enough to warrant renegotiation?

Don’t be afraid to update contracts or reward people who’ve stuck with you. Loyalty in a startup is worth a lot, and recognising that goes a long way.