Startup Life/Analysis/

How much should startups pay their first 10 employees?

We spoke to the experts to find out how startups can offer competitive compensation for their very first employees

By Miriam Partington in Berlin

Emilia Theye (left) and Celina Messner (right)

Building an early-stage team is undeniably tricky — especially for startups with little cash. 

Founders are often quick to make their first hires, focusing on getting the process done and moving on to the next task, without taking the time to find the right person.

But this is a mistake. As a founder, your first 10 employees are the building blocks of the business — the people you trust the most and who you hope will stick around for a long time — so it’s important to get early hires right.

Part of attracting quality talent involves offering a competitive salary and compensation package. But what should you pay your early employees, especially when resources are tight?

What should you pay your first employees?

There’s no industry standard for what tech startups should pay their early employees, because there are so many variables affecting who should get paid what, says Alex Lewis, talent manager at European seed-stage VC firm Seedcamp.

“If you’re bootstrapped, the salaries you offer will be different to a well-funded seed-stage startup,” he explains. Other things that come into play include the industry vertical of the company, the experience of the person you’re hiring and what kind of role you’re hiring for — “for example, if you need a software engineer from an ecommerce background versus a deeptech background.” In some cases, location can also come into play when setting salaries. 

Lewis says a good starting point for setting pay is using salary benchmarks — such as Otta and Figures — which give you an average salary for each role. “Then you’d need to go a little bit more in depth about the market you’re in, the seniority and expertise you need,” he adds. 

A way of doing this is to talk to other founders within your subsector who run a similar-size company and ask what they’re paying their early employees. What you pay your first 10 team members also depends on the type of business you’re running, what roles you require — and how much cash you have in the bank.

Dennis Müller, founder of productivity app Amie, which he launched in 2020, says his first 10 employees were software designers and engineers, who were all initially paid between €66k and €75k. 

Tech roles, such as front-end and back-end developers and software engineers, are usually the most expensive to recruit, says Emilia Theye, cofounder of clare&me, an AI-based mental health startup offering psychotherapeutic support through an app.

Her Berlin-based company currently has 10 employees, whose wages fall into two brackets: those in tech roles earn higher wages  at industry standard that are between 50-70K, whilst other roles earn a bit less.

The individual wages will depend on an employee’s level of seniority. In Berlin, for example, a junior software engineer earns around €55k, whilst a senior software engineer earns around €75k, according to data from global VC firm Antler. 

No need to pay the big bucks

Both Seedcamp’s Lewis and Alan Poensgen, partner at Antler, say that early-stage startups shouldn’t focus on trying to get top-tier talent, as the reality is that most startups can’t afford to pay the salaries that larger corporations offer. Poensgen says that startup employees should expect to accept a salary between 30 and 40% lower than the one they’d typically be offered by a larger corporate.

“In the very early stages of a startup you can’t afford to pay for experience, but you don’t necessarily need to. At Antler, we frequently advise our founders to prioritise talent and potential over experience for their first hire,” says Poensgen.

“Often it pays… to get a really exceptional junior generalist rather than competing with consultancy or scaleup salaries for experienced hires”

“Often it pays… to get a really exceptional junior generalist rather than competing with consultancy or scaleup salaries for experienced hires,” he adds.

There are other ways startups can compensate for salaries that may be below market standard — for example, with attractive benefits packages.

Lewis says that flexible benefits platforms such as Peppy or Juno, which offer employees the ability to choose their own benefits, are a great way of attracting talent. Offering equity is another way early-stage startups typically attract talent. 

Headshot of Alan Poensgen, partner at Antler VC
Alan Poensgen, partner at Antler VC

“Giving early employees a slice of the pie is going to give them the buy-in from the get go, because you’re providing them with a long-term incentive to remain within a company,” Lewis says.

How does equity work at a startup? 

When employees apply to a startup, they’ll often get the choice between a mix of salary and option packages. For example, the choice may be between a £30k salary plus 5,000 options, or a £33k salary and 3,000 options. 

Here are a few key things you need to know when thinking of offering equity to employees.

The difference between offering shares and offering options

Giving employees shares means allowing them to immediately become a shareholder in the company, with all the voting and other shareholder rights that entails.

Giving an individual options, however, gives them the right to purchase shares in the future — sometimes at a discount, if the options were assigned when the startup had a lower valuation. The rights attached to these shares can then only be accessed once the individual has bought them. This is the most common way of giving employees equity in a business.

What is an options pool?

An options pool is the total amount of equity (a percentage of total company equity) you set aside for employee options. How you allocate options to your employees will vary depending on the size of your options pool.

Why should you give equity to early-stage startup employees?

  • It’s an effective way of attracting top talent when you’re not in the position to provide big salaries.
  • It’s motivating for employees: they want to work to build a successful company with the promise of having their efforts rewarded further down the line.
  • Employee equity schemes such as EMI (Enterprise Management Incentive) offer great tax benefits for companies and their staff and encourage long-term commitment from employees.
  • It provides a long-term incentive for employees to remain with a company.

How much company equity should be available for your early employees?

Clare&me has sectioned off 10% of its option pool for employees, and each person gets a different percentage of those options based on their value in the company and their level of seniority.

“What you allocate changes as you grow because, for example, a team member might leave so they would then have to give back the options. Or, you might do a new funding round and an investor will tell you that 10% equity to employees is too little, you need to give them 15%,” explains clare&me’s Theye. 

Swedish fintech Treyd.io does it slightly differently. It does not have an options pool, but its equity is set based on a percentage of the employee’s annual salary, and the valuation of the company in the last round — the employees’ options will grow as the company moves through funding stages. The startup’s founders have put aside 15% equity for all employees as the company matures — so far 7% has been given away to its 46 employees.

“Giving early employees a slice of the pie is going to give them the buy-in from the get go, because you’re providing them with a long-term incentive to remain within a company”

According to Index Ventures and Balderton Capital, startups raising early-stage funding should start by setting aside 10% of total company equity for their employee options pool. 

Index Ventures also has an equity benchmarking tool to help companies assess how much equity they should be awarding employees, based on the company size, stage and geographic location. 

The amount of equity you ultimately choose to give employees will also depend on your cashflow. Typically, early-stage companies that can’t afford to pay big salaries will compensate with higher options for first employees.

UK VC Balderton recommends giving the first 10 employees 1% of total company equity each — a practice that is already quite common in the US. 

Amie’s Müller says he assigned his first 10 employees 1% equity as he thought “that was fair” given that they “joined the company early and might have taken on some risk”.

Once startups employ more than 50 employees, they typically start to offer employee stock ownership plans (commonly referred to as an ESOP). These are a more standardised way of granting equity in a business as it grows, and moving away from the more individualised allocation that employees might get when they join a company early.

How should equity be split among your team?

A typical approach is to offer equity based on an employee’s seniority. 

Balderton gives the following guidelines, relevant for early and mid-stage companies.

How do employee options change over time?

An employee options pool is not fixed, and can change depending on a company’s hiring plans, as well as financing rounds.

From the total equity set aside for the ESOP, companies will typically allocate between 3.1% and 7.1% to employees up to Series B, and keep up to 3.9% unallocated (shares not currently allocated to any participant in the ESOP at a given time). 

 

Miriam Partington is Sifted’s DACH correspondent. She also covers future of work, coauthors Sifted’s Startup Life newsletter and tweets from @mparts_

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