Compensation & Equity Guide for Startups

Purpose

This recipe produces a complete startup compensation framework: salary band matrices by role, level, stage, and geography; an equity grant guide with percentage ranges by employee number and seniority; an offer calculator spreadsheet; vesting schedule documentation; and a written compensation philosophy. The output is a system for making consistent, defensible offers — not a theoretical discussion of pay strategy. [src1]

Prerequisites

• Cap table available from Carta, Pulley, or spreadsheet — fully diluted share count and current option pool size must be known
• Hiring plan — list of roles to hire in the next 12 months with priority, level, and target start dates
• Funding stage and runway — determines salary competitiveness and cash-vs-equity mix
• 409A valuation — current fair market value per share from Carta 409A or independent firm
• Board approval for option pool — pool must be authorized before any grants can be made

Constraints

• Option strike price must equal or exceed the 409A fair market value at time of grant. Underpriced options trigger IRC Section 409A penalties — 20% additional tax plus interest for the employee. [src6]
• Equity pool sizing happens during fundraising. Standard pool is 10-20% of fully diluted equity. Investors typically require the pool be created pre-money. [src2]
• Compensation benchmarks expire within 12 months. Re-benchmark at every funding round or annually, whichever comes first. [src1]
• Geographic pay differentials must be documented in the compensation philosophy and applied consistently. [src5]
• All equity grants require board approval. Verbal promises without board authorization are unenforceable and create legal liability.

Tool Selection Decision

Which path?
├── Pre-seed / bootstrapped, < 5 employees
│   └── PATH A: Manual benchmarking — free tools + spreadsheet
├── Seed stage, 5-15 employees, first formal hiring
│   └── PATH B: Structured framework — free benchmarks + documented bands
├── Series A, 15-50 employees, need repeatability
│   └── PATH C: Professional framework — paid benchmarking + offer calculator
└── Series B+, 50+ employees, compliance matters
    └── PATH D: Enterprise comp platform — Carta Total Comp or Pave

Execution Flow

Step 1: Benchmark Market Rates

Duration: 2-4 hours · Tool: Carta Total Comp, Pave, Levels.fyi

Collect salary and equity data for every role in the hiring plan. Benchmark at the 50th percentile as the starting point, then adjust based on compensation philosophy.

Sample Benchmark Output (US, Series A, 2025-2026):
Role                    | P25      | P50      | P75
Senior Software Eng     | $165,000 | $185,000 | $210,000
Staff Software Eng      | $195,000 | $220,000 | $250,000
Product Manager         | $150,000 | $175,000 | $200,000
Senior Product Manager  | $170,000 | $195,000 | $225,000
Product Designer        | $130,000 | $155,000 | $180,000
Marketing Manager       | $115,000 | $135,000 | $160,000
Sales AE (base only)    | $75,000  | $90,000  | $110,000
Head of Engineering     | $200,000 | $235,000 | $270,000
VP Product              | $195,000 | $230,000 | $265,000

Verify: P25/P50/P75 data for every role, from 2+ sources, filtered by stage and geography. · If failed: Combine Levels.fyi + AngelList + Glassdoor. Discount Big Tech data by 15-25% for startup context.

Step 2: Design Salary Bands by Role and Level

Duration: 3-4 hours · Tool: Google Sheets

Convert benchmark data into structured salary bands with min (85% of midpoint), mid (P50), and max (115% of midpoint) for each level.

Sample Salary Bands (US Tech Hub, Series A):
Engineering:
  L3 (Mid-level):     $145,000 - $170,000 - $195,000
  L4 (Senior):        $165,000 - $195,000 - $225,000
  L5 (Staff):         $195,000 - $230,000 - $265,000
  VP Engineering:     $250,000 - $295,000 - $340,000
Product:
  PM (Mid-level):     $135,000 - $160,000 - $185,000
  Senior PM:          $165,000 - $195,000 - $225,000
  VP Product:         $225,000 - $265,000 - $305,000
Design:
  Product Designer:   $120,000 - $140,000 - $160,000
  Senior Designer:    $145,000 - $170,000 - $195,000

Verify: Every role maps to a band; bands have 30-35% spread; adjacent levels overlap 10-15%. · If failed: Adjust multiplier (0.80-0.90 min, 1.10-1.20 max) if bands feel too wide or narrow.

Step 3: Create Equity Pool Allocation Guide

Duration: 3-4 hours · Tool: Google Sheets + cap table data

Build an equity grant matrix that maps recommended grant sizes (as % of fully diluted equity) by role, seniority, and employee join number. [src3]

Equity Grant Guide by Employee Number (% of FDE):
Employee #    | C-level  | VP/Director | Senior IC | Mid IC    | Junior
1-2 (co-fnd)  | 1.5-3.0% | —        | 1.0-2.0%  | —       | —
3-5           | 1.0-2.0% | 0.5-1.5%   | 0.5-1.0%  | 0.25-0.5% | —
6-10          | 0.5-1.5% | 0.3-0.8%   | 0.25-0.5% | 0.1-0.3%  | 0.05-0.15%
11-20         | 0.4-1.0% | 0.2-0.5%   | 0.15-0.3% | 0.05-0.15%| 0.02-0.08%
21-50         | 0.25-0.5%| 0.1-0.3%   | 0.05-0.15%| 0.02-0.08%| 0.01-0.04%
51-100        | 0.1-0.3% | 0.05-0.15% | 0.02-0.08%| 0.01-0.04%| 0.005-0.02%

Key: First hire ~1.5%; 5th hire ~0.3%; first 5 combined median ~3.6%

Verify: Total grants for projected hires fit within the option pool. · If failed: Reduce individual grants, negotiate larger pool at next round, or prioritize equity for engineering/product roles.

Step 4: Build the Offer Calculator

Duration: 2-3 hours · Tool: Google Sheets

Create a spreadsheet that generates total compensation packages given role, level, geography, and employee number.

Geographic Adjustment Factors:
  Tier 1 (SF, NYC, Seattle):        1.10 - 1.20x baseline
  Tier 2 (Austin, Denver, Chicago):  1.00x (baseline)
  Tier 3 (Other US markets):         0.85 - 0.95x baseline
  International (Western Europe):    0.75 - 0.90x US baseline
  International (LATAM, SEA):        0.50 - 0.70x US baseline

Comp Philosophy Adjustments:
  Cash-heavy:   Base at P60-P75, equity at P25
  Balanced:     Base at P50, equity at P50
  Equity-heavy: Base at P25-P40, equity at P75

Verify: Calculator produces reasonable total comp for 5 test scenarios. · If failed: Cross-check against Levels.fyi or Pave public data; adjust if results diverge by >15%.

Step 5: Set Vesting Schedule and Equity Terms

Duration: 1-2 hours · Tool: Document editor + legal template

Define the standard vesting schedule and equity terms for all employee grants. [src6]

Standard Vesting: 4 years, 1-year cliff
  Month 0-11:  0% vested (cliff period)
  Month 12:    25% vests (cliff)
  Month 13-48: ~2.08%/month (monthly vesting)
  Month 48:    100% fully vested

Equity Vehicles:
  ISOs:  US employees, tax-advantaged, $100K/yr limit
  NSOs:  Anyone (international, contractors, advisors)
  RSUs:  Typically Series B+ (need liquidity for tax)

Post-Departure: 90 days standard; 1+ year recommended for 2+ yr tenure

Verify: Vesting schedule, equity vehicle, and exercise terms documented; legal counsel has reviewed. · If failed: Engage startup legal counsel ($2-5K) to create a standard equity incentive plan.

Step 6: Document the Compensation Philosophy

Duration: 3-4 hours · Tool: Document editor

Write a 4-8 page internal document codifying every decision from Steps 1-5. [src5]

Philosophy Document Sections:
  1. Executive Summary (stage, positioning, core principle)
  2. Market Positioning (percentile targets by component)
  3. Salary Bands (level framework + band tables)
  4. Equity Grants (pool size, grant guide, refreshes, promotions)
  5. Geographic Adjustments (tier definitions + factors)
  6. Vesting & Equity Mechanics (schedule, vehicles, 83(b))
  7. Review Cadence (annual cycle, re-benchmarking triggers)
  8. Exceptions & Approvals (authority levels for band exceptions)

Verify: All 8 sections complete; reviewed by CEO + hiring manager + advisor. · If failed: Start with sections 1-4 only; add remaining as the company scales past 20 employees.

Output Schema

{
  "output_type": "compensation_framework",
  "format": "spreadsheet + document",
  "columns": [
    {"name": "salary_band_matrix", "type": "spreadsheet", "description": "Min/mid/max salary ranges by role, level, and geography tier", "required": true},
    {"name": "equity_grant_guide", "type": "spreadsheet", "description": "Recommended equity grants (% FDE) by role, seniority, and employee number", "required": true},
    {"name": "offer_calculator", "type": "spreadsheet", "description": "Input role/level/geography/employee# to generate total comp package", "required": true},
    {"name": "vesting_terms", "type": "document", "description": "Vesting schedule, equity vehicle, exercise window, 83(b) guidance", "required": true},
    {"name": "comp_philosophy_doc", "type": "document", "description": "4-8 page internal document codifying all compensation policies", "required": true}
  ],
  "expected_row_count": "1 framework (covers all roles)",
  "sort_order": "N/A",
  "deduplication_key": "company_name + effective_date"
}

Quality Benchmarks

If below minimum: If offer acceptance rate is below 60%, re-benchmark with fresh data and consider targeting P60 instead of P50. If unexplained pay gaps exceed 20%, audit all offers against bands and correct outliers at next review cycle.

Error Handling

Cost Breakdown

Anti-Patterns

Wrong: Setting equity grants based on gut feel per candidate

Individual negotiation without a framework creates wildly inconsistent cap table entries. Employee #8 with 0.8% and employee #12 with 1.2% for the same role creates resentment when employees compare notes. [src3]

Correct: Use the equity grant guide consistently

Every offer references the equity guide matrix. Grants determined by role, level, and employee number — not by negotiation leverage. Exceptions require CEO approval and documentation.

Wrong: Promising equity without a board-approved stock option plan

Verbal equity promises before board approval are unenforceable and create legal liability. Candidates may accept based on promises that cannot be fulfilled. [src6]

Correct: Establish the equity plan before the first hire

Engage legal counsel to create a standard equity incentive plan before making any offers referencing equity. Cost is $2-5K and takes 2-4 weeks.

Wrong: Using a single national salary for all geographies

Paying Bay Area rates in Tier 3 markets overspends. Paying Tier 3 rates in Bay Area guarantees rejection. [src5]

Correct: Define 3-4 geographic tiers with documented adjustment factors

Establish Tier 1 (1.10-1.20x), Tier 2 (1.00x baseline), Tier 3 (0.85-0.95x), and International tiers. Document in comp philosophy and apply consistently.

When This Matters

Use this recipe when a startup needs to build a compensation framework for the first time — typically at seed or Series A when moving beyond founder-only teams. Requires a cap table, hiring plan, and funding stage. This recipe produces salary bands, an equity guide, an offer calculator, and a compensation philosophy — not a one-off salary decision for a single hire.