Compensation and the Early Stage Startup
There are not a lot of guidelines for startup compensation models. A lot of it comes down to putting together a win-win model that on the one hand is compatible with the realities of the company's cash-flow today, and on the other hand is a win for everybody if revenue ramps.
When the company is pre-revenue and has not received any investment funding, you certainly see situations where the founding team doesn't take any salary at all. But that can get into issues. Employees need to be paid (state law says so). So you should check with an attorney or with a human resource professional to make sure you set up your compensation structure in a way that's legal!
The very early (founding) team in a startup typically purchases their stock. At some point, for later hires, a startup typically begins awarding stock options instead of having new employees purchase their stock. Setting up a stock option plan is complicated and has to be done the right way, so it's a job for your attorney.
A common question that comes up is: for later hires, how many options are appropriate? I've seen numbers that vary quite a lot (and others might give you different numbers) but here are the ranges that I've typically seen for later (non founder) hires. In each case, I've listed not number of shares, but rather percentage ownership in the company represented by the stock options. Note that employee stock options are almost always set up to vest over time, 4 years being typical.
Typical amounts I've seen are listed below. Where someone falls in the range is typically based on level of experience and accomplishment:
- CEO: 4% to 8%
- COO: 3% to 5%
- Other Cxx positions: 2% to 3%
- VP of Engineering: 2% to 4%
- Other VPs: 1.5% to 3%
- Director positions: 0.75% to 1.5%
- Key engineering positions: 0.75% to 1.5%
Other Resources
Paul Grant has an essay on "The Equity Equation" that's worth reading - it's an interesting perspective.