Guide
Compensation Guide for Startups: How to Build a Fair, Competitive, and Scalable Strategy
Global HR

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Startups live and die by their ability to hire and keep great people. But as someone running PeopleOps (often solo), you’re not just thinking about attracting talent—you’re also balancing limited budgets, evolving pay transparency laws, and growing pressure from leadership to “make compensation make sense.”
This guide is here to help you do just that.
Compensation guide for startups overview
This compensation guide for startups covers the fundamentals, walks you through real-world startup examples, and gives you tactical steps to roll out a strategy you can actually maintain, whether you’re hiring employee number 15 or scaling past 150.
The guide covers:
- The state of startup compensation: Average startup salaries, equity trends, and fair market value
- Why compensation matters: How pay structures influence whether talent accepts your job offer and the probability of retaining your new hires as your business grows
- Key challenges startups face: Balancing budget constraints, global compliance, and pay transparency
- Essential elements of a startup compensation strategy: Salary bands, equity distribution, benefits and perks, and performance-based incentives
- Case studies from top startups: How companies like Sourcegraph, Float, and Eight Sleep structure their compensation
- How Deel simplifies compensation management: Startups can integrate payroll, benefits, and global compliance into one single, centralized platform that becomes your source of truth
Who will benefit from this guide?
This guide is designed for:
- Startup founders and executives looking to create a compensation framework that aligns with company goals
- HR and people teams who need to navigate average salary bands, equity structures, and compliance
- Finance and operations leaders managing payroll, equity distributions, and cost-effective compensation strategies
- Investors and advisors supporting early-stage companies in designing competitive pay frameworks
Key terms for startup compensation
Key term | Definition | How it relates to a startup compensation strategy |
---|---|---|
Employee equity | A form of ownership in the company, usually offered as part of the compensation package to give employees a stake in the company’s success. | Startups use a variable amount of equity to attract talent without high salaries |
Stock options | The right to buy company shares at a fixed price (called the strike price) in the future, usually after meeting certain time or performance milestones. | Helps align employee incentives with company growth |
Vesting schedule | The timeline over which an employee earns their equity. Instead of getting it all at once, it becomes available gradually | Encourages long-term commitment and reduces turnover. A common vesting schedule is four years, with a one-year cliff. |
(Year) cliff | A cliff is the initial waiting period before any equity vests. If an employee leaves before the cliff ends, they lose all of it. Once the cliff is reached, a chunk vests at once, and the rest continues on a regular schedule. One year is most common, but cliffs can vary. | Year cliffs ensure commitment and discourage early departures. For early-stage startups, this is a standard practice to protect the cap table from short-term contributors. |
Strike price | The set price at which an employee can purchase their stock options, usually based on the company’s value when the options are granted. | The strike price directly affects the amount of equity a worker benefits from. It’s a key part of understanding total compensation. |
Stock price | The current value of a company’s shares. For private companies, it’s based on internal valuations or funding rounds; for public companies, it’s what the stock trades for on the market. | Unlike base salaries, equity is a form of compensation that fluctuates with company performance. Understanding the stock price and strike price is essential before deciding when or whether to sell shares. |
Total compensation | The full value of what an employee earns. It includes base salary, bonuses, equity, and benefits. | Gives a full picture of employee earnings beyond just salary |
Company valuation | How much the company is currently worth, typically based on its most recent funding round. It influences both the amount and value of employee equity. | Affects how much equity employees receive and its future value |
Market rate compensation | Salary levels that are competitive in the industry, role, and location. Used to benchmark base pay and total offers. | Ensures competitiveness in hiring and retention |
Base salary | The guaranteed amount an employee earns in cash, before bonuses, or equity. It’s the foundation of most compensation packages. | Forms the foundation of compensation, often supplemented with startup equity |
Whether you’re hiring your first employee or scaling fast across borders, create the structure to move forward with confidence. Download the guide now. Download the guide now.
FAQs
How do you pay employees when first starting a business?
Most startup co-founders pay employees through a combination of base salary, equity, and performance-based incentives. Many will need to offer lower salaries than more established competitors but balance this out with higher equity stakes to offset their limited cash flow.
How do startups afford to pay employees?
Typically, startups pay employees through a combination of:
- Venture capital funding or angel investment
- Revenue (if profitable or cashflow positive)
- Deferred compensation (e.g., low salary + high equity)
- Lower headcount with lean operations
They may optimize compensation packages by balancing modest base salaries with generous equity, flexible work, and other employee benefits. In the early stages, they may also offer non-monetary perks as a differentiator.
How do startups compensate employees?
Startups that can’t match the higher salary offerings of their competitors often use a mix of cash salary, stock options, bonuses, and benefits to create an enticing compensation package. It’s important to be as creative as possible to attract job seekers to join the ranks of your startup.
How do new businesses afford to pay employees?
Startups may initially rely on fundraising, venture capital, or equity grants to cover their payroll. Many also use deferred compensation agreements or milestone-based bonuses to manage their costs.
Do startups pay bonuses?
Startups sometimes pay bonuses, but not always. Bonuses are more common in later-stage or well-funded startups, especially as performance incentives. In early-stage companies:
- Cash bonuses are rare (due to budget constraints)
- Milestone-based bonuses (like product launches or fundraising closes) are more typical
- Equity refreshers or retention grants may serve a similar purpose
Startups often rely on equity as a long-term incentive instead of structured bonus programs.
Is 1% equity good at a startup?
The right amount of equity depends on the stage and valuation of the startup. For example, a 1% equity stake in an early-stage tech startup could be significant if the business scales successfully. But it’s important to consider how this investment will dilute over time.
Is 100% equity too risky?
Yes, 100% equity is too risky for most people. Being compensated in 100% equity with no cash salary is generally only viable for founders or very early employees who can afford to forgo income. For regular hires:
- There’s no guarantee of liquidity
- You still need to pay taxes, rent, and bills
- It could violate local compensation and benefits laws, depending on the jurisdiction
Startups that can’t offer any base pay should be clear about the risk and ideally offer meaningful upside and control.
What is the typical equity compensation for a startup CEO?
Startup CEOs often receive 5-20% equity in early-stage companies, decreasing as the company secures more funding throughout Series A, Series B, and Series C rounds.
Read more: Startup Founder Salary: How to Pay Yourself as a Startup CEO
How does an IPO influence a compensation strategy?
An IPO converts stock options into publicly tradable shares, potentially increasing employee compensation. Companies may adjust salary structures and bonus incentives to remain competitive post-IPO.
Do startups pay more than big tech?
Startups rarely pay more than big tech, especially not in cash. Startups often cannot match the base salaries or bonus structures offered by large tech companies like Google or Meta. Instead, they aim to offer competitive compensation through:
- Higher equity upside (though more speculative)
- Mission alignment and faster growth paths
- More flexibility (remote work, work-life balance)
However, some well-funded startups in hot markets can and do match or exceed big tech pay, but it’s rare and usually limited to key roles (engineering, executive hires).
What is the rate of return for a startup?
The rate of return in startups depends on the startup. Most startups fail, but those that succeed may deliver extraordinary equity returns. The rate of return is influenced by:
- Equity size (percentage of ownership)
- Stage of the company when you joined
- Exit conditions (acquisition, IPO, or failure)
- Liquidity preferences and dilution over time
Rule of thumb: Equity at an early-stage startup is high-risk, high-potential. The actual ROI often comes years down the line, if at all.