---
# === IDENTITY ===
id: business/startup-hiring/compensation-equity-guide-for-startups/2026
canonical_question: "How do I set startup compensation — salary bands by role/stage/geography, equity allocation by role and join stage?"
aliases:
  - "Startup compensation and equity guide 2026"
  - "Salary bands and equity allocation by startup stage"
  - "Stock option vesting and salary benchmarking for startups"
entity_type: execution_recipe
domain: business > startup-hiring > compensation equity guide for startups
region: global
jurisdiction: global
temporal_scope: 2025-2026

# === VERIFICATION ===
last_verified: 2026-03-12
confidence: 0.88
version: 1.0
first_published: 2026-03-12

# === TEMPORAL VALIDITY ===
temporal_validity:
  status: evolving
  last_breaking_change: "Startup salaries rose ~5% in 2024-2025; AI/ML engineer salaries jumped 5-9% above market; equity offers increased 15% in Q1 2025 with 25% more companies issuing equity; product manager salaries now tied with engineering at ~$189K median"
  next_review: 2026-09-08
  change_sensitivity: high

# === CONSTRAINTS ===
constraints:
  - "Equity pool must be sized before any offers are made — retroactively creating a pool after promising grants leads to cap table chaos and legal risk"
  - "Option strike price must equal or exceed 409A fair market value at time of grant — underpriced options create tax penalties for employees (IRC Section 409A)"
  - "All equity grants require board approval — verbal promises without board authorization are unenforceable and create liability"
  - "Geographic pay differentials must be documented and consistently applied — ad hoc adjustments per candidate create pay equity lawsuits"
  - "Compensation data is perishable — benchmarks older than 12 months are unreliable; re-benchmark at every funding round"

# === SKIP CONDITIONS ===
skip_this_unit_if:
  - condition: "User is a post-Series C company with 200+ employees needing enterprise comp management"
    use_instead: "business/people-ops/hr-tech-stack-assessment/2026"
  - condition: "User needs to structure founder equity splits, not employee compensation"
    use_instead: "business/fundraising/founder-vesting/2026"
  - condition: "User needs sales-specific commission structure, not general compensation"
    use_instead: "business/startup-sales/sales-strategy-early-stage-startups/2026"

# === AGENT HINTS ===
inputs_needed:
  - key: funding_stage
    question: "What is the startup's current funding stage?"
    type: choice
    options: ["Pre-seed/bootstrapped", "Seed ($1-4M raised)", "Series A ($5-20M raised)", "Series B+ ($20M+ raised)"]
  - key: headcount
    question: "How many employees does the startup have?"
    type: choice
    options: ["1-5 (founding team only)", "6-15 (first hires)", "16-50 (scaling)", "50+ (growth stage)"]
  - key: geography
    question: "Where is the team primarily located?"
    type: choice
    options: ["SF Bay Area / NYC", "Other US tech hubs (Austin, Denver, Seattle, Boston)", "US — other markets", "International (EU/UK/APAC)", "Fully remote / distributed"]
  - key: budget_priority
    question: "What is the compensation philosophy priority?"
    type: choice
    options: ["Cash-heavy (compete on salary, less equity)", "Equity-heavy (lower salary, larger grants)", "Balanced (market salary + meaningful equity)", "No preference — auto-select based on stage"]

# === EXECUTION METADATA ===
execution:
  required_inputs:
    - name: "Funding stage and runway"
      source: "founder or CFO"
      format: "stage label + months of runway remaining"
    - name: "Hiring plan"
      source: "founder or hiring manager"
      format: "list of roles to hire with priority and timeline"
    - name: "Cap table"
      source: "Carta, Pulley, or spreadsheet"
      format: "fully diluted share count, option pool size, shares available for grants"
  outputs:
    - name: "Salary band matrix"
      format: "spreadsheet"
      description: "Min/mid/max salary ranges for each role and level, adjusted by geography and stage"
    - name: "Equity grant guide"
      format: "spreadsheet"
      description: "Recommended equity grants (% of FDE) by role, seniority, and employee number"
    - name: "Offer calculator"
      format: "spreadsheet"
      description: "Tool that generates total comp offers given role, level, location, and employee number"
    - name: "Compensation philosophy document"
      format: "document"
      description: "4-8 page internal document codifying pay philosophy, band methodology, equity policy, and geographic adjustments"
  tools_required:
    - name: "Carta Total Comp"
      purpose: "Real-time salary and equity benchmarking from 40,000+ companies"
      tier: "paid"
      cost: "$0 (basic benchmarks with Carta account) to custom pricing for Total Comp product"
      alternatives: ["Pave ($0 free benchmarks)", "Levels.fyi (free public data)", "Option Impact (paid)"]
    - name: "Pave"
      purpose: "Compensation benchmarking and equity band data"
      tier: "free"
      cost: "$0 (free benchmarks) to paid plans for full platform"
      alternatives: ["Carta Total Comp", "Radford/Aon (enterprise)", "Mercer (enterprise)"]
    - name: "Google Sheets or Excel"
      purpose: "Salary band matrix, equity guide, and offer calculator"
      tier: "free"
      cost: "$0"
      alternatives: ["Airtable", "Notion databases"]
  credentials_needed:
    - service: "Carta"
      type: "username+password"
      where_to_get: "https://carta.com/signup/"
      free_tier_limits: "Basic cap table management free for startups; Total Comp benchmarks require paid plan or Carta equity customers"
    - service: "Pave"
      type: "username+password"
      where_to_get: "https://www.pave.com/"
      free_tier_limits: "Free benchmarking with data sharing agreement; full platform is paid"
  estimated_duration: "2-4 days for complete compensation framework; 1 day for basic salary bands only"
  estimated_cost: "$0 (free benchmarking tools) to $5,000-15,000/year (paid compensation platforms)"

# === DISTRIBUTION ===
canonical_source: "https://knowledgelib.io/business/startup-hiring/compensation-equity-guide-for-startups/2026"
suggested_citation: "Source: knowledgelib.io — AI Knowledge Library (verified 2026-03-12)"

# === RELATED UNITS ===
related_kos:
  depends_on:
    - id: "business/fundraising/cap-table-management/2026"
      label: "Cap table must be accurate before sizing equity grants"
    - id: "business/fundraising/equity-dilution/2026"
      label: "Understanding dilution mechanics before allocating option pool"
  feeds_into:
    - id: "business/startup/first-10-hires-playbook/2026"
      label: "First 10 startup hires — role sequencing, comp benchmarks, and equity allocation framework"
  related_to:
    - id: "business/fundraising/founder-vesting/2026"
      label: "Founder equity structures complement employee equity design"
    - id: "business/fundraising/series-a-readiness/2026"
      label: "Investors evaluate comp structure during due diligence"
  alternative_to: []

# === SOURCES ===
sources:
  - id: src1
    title: "State of Startup Compensation: H1 2025"
    author: Carta
    url: https://carta.com/data/startup-compensation-h1-2025/
    type: industry_report
    published: 2025-07-01
    reliability: authoritative
  - id: src2
    title: "Equity Compensation: A Complete Guide for Startups"
    author: Ravio
    url: https://ravio.com/blog/the-complete-guide-to-equity-compensation-for-startups
    type: technical_blog
    published: 2025-09-01
    reliability: high
  - id: src3
    title: "How Much Equity to Give Your First Employees: Real Data from 50,000 Startups"
    author: SaaStr
    url: https://www.saastr.com/how-much-equity-to-give-your-first-employees-the-real-data-from-50000-startups/
    type: industry_report
    published: 2025-06-01
    reliability: authoritative
  - id: src4
    title: "How to Structure Startup Equity for Early Hires"
    author: Pear VC
    url: https://pear.vc/how-to-structure-startup-equity-for-early-hires/
    type: technical_blog
    published: 2025-04-01
    reliability: high
  - id: src5
    title: "Compensation Philosophy: Creating a Framework"
    author: Carta
    url: https://carta.com/learn/startups/compensation/compensation-philosophy/
    type: official_docs
    published: 2025-08-01
    reliability: authoritative
  - id: src6
    title: "Vesting and Cliffs — The Holloway Guide to Equity Compensation"
    author: Holloway
    url: https://www.holloway.com/g/equity-compensation/sections/vesting-and-cliffs
    type: book
    published: 2025-01-01
    reliability: authoritative
  - id: src7
    title: "Rewarding Talent: Allocation Considerations and Benchmarks"
    author: Index Ventures
    url: https://www.indexventures.com/rewarding-talent/allocation-considerations-and-benchmarks
    type: industry_report
    published: 2025-03-01
    reliability: authoritative
---

# 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 (required for option pricing; obtain from Carta 409A or independent valuation 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 (FDE). Investors typically require the pool be created pre-money, meaning existing shareholders bear the dilution. [src2]
- Compensation benchmarks expire within 12 months. Re-benchmark at every funding round or annually, whichever comes first. Using 2-year-old data leads to uncompetitive offers or overpaying. [src1]
- Geographic pay differentials must be documented in the compensation philosophy and applied consistently. Ad hoc location adjustments per candidate create pay equity liability. [src5]
- All equity grants require board approval. Verbal promises without board authorization are unenforceable and create legal liability for the company.

## 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
```

| Path | Tools | Cost | Time to Build | Rigor |
|------|-------|------|---------------|-------|
| A: Manual | Levels.fyi + Google Sheets | $0 | 1 day | Basic — covers immediate needs |
| B: Structured | Pave free + Sheets + documented philosophy | $0 | 2 days | Good — repeatable for 15-20 hires |
| C: Professional | Carta/Pave paid + Sheets + formal bands | $200-500/mo | 3-4 days | Strong — audit-ready for Series A due diligence |
| D: Enterprise | Carta Total Comp / Pave platform | $5K-15K/yr | 1-2 weeks | Comprehensive — scales to 200+ employees |

## 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 your hiring plan. Benchmark at the 50th percentile as the starting point, then adjust based on your compensation philosophy.

```
Benchmarking Process:
──────────────────────────────────────────────────
1. List all roles to hire (e.g., Senior Software Engineer, Product Manager, etc.)

2. For each role, collect from 2+ sources:
   - 25th percentile (budget-conscious / equity-heavy comp)
   - 50th percentile (market rate — your starting midpoint)
   - 75th percentile (competing with Big Tech for talent)

3. Data sources (use at least two):
   - Carta Total Comp: carta.com/data/ (most reliable for VC-backed startups)
   - Pave: pave.com (free benchmarks with data sharing)
   - Levels.fyi: levels.fyi/comp.html (strong for engineering; skews Big Tech)
   - Option Impact: optionimpact.com (requires membership via VC)

4. Filter benchmarks by:
   - Company stage (seed, Series A, Series B+)
   - Geography (SF/NYC, other tech hubs, national)
   - Company size (headcount range)
   - Function (engineering, product, design, marketing, sales, G&A)

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**: You have P25/P50/P75 salary data for every role in the hiring plan, from at least two benchmark sources, filtered by stage and geography.
**If failed**: If paid tools are unavailable, combine Levels.fyi (engineering) with AngelList Talent salary data and Glassdoor ranges. 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, mid, and max for each level. Bands provide consistency and prevent per-candidate negotiation chaos.

```
Salary Band Structure:
──────────────────────────────────────────────────
Each band has three zones:
  - Min (entry to level, typically P25-P35): 85% of midpoint
  - Mid (fully performing, P50): market benchmark
  - Max (top of level, P65-P75): 115% of midpoint
  - Overlap between adjacent levels: 10-15% (allows growth without promotion)

Band Width Formula:
  Min = Midpoint x 0.85
  Max = Midpoint x 1.15
  Band width = (Max - Min) / Min = ~35%

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
  L6 (Principal):     $230,000 - $270,000 - $310,000
  M1 (Eng Manager):   $185,000 - $220,000 - $255,000
  M2 (Director):      $220,000 - $260,000 - $300,000
  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
  Group PM / Director:$195,000 - $230,000 - $265,000
  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
  Design Lead:        $170,000 - $200,000 - $230,000

Marketing:
  Marketing Manager:  $105,000 - $125,000 - $145,000
  Senior Marketing:   $130,000 - $155,000 - $180,000
  VP Marketing:       $185,000 - $220,000 - $255,000

Sales (base salary only, excludes variable):
  SDR:                $50,000  - $60,000  - $70,000
  Account Executive:  $75,000  - $90,000  - $110,000
  Senior AE:          $100,000 - $120,000 - $140,000
  VP Sales:           $175,000 - $210,000 - $245,000

G&A:
  Operations Manager: $90,000  - $110,000 - $130,000
  Finance Manager:    $110,000 - $130,000 - $150,000
  Head of People:     $150,000 - $180,000 - $210,000
```

**Verify**: Every role in the hiring plan maps to a band. Bands have 30-35% spread, adjacent levels overlap by 10-15%, and midpoints align with P50 benchmarks.
**If failed**: If bands feel too wide or too narrow, adjust the multiplier (0.80-0.90 for min, 1.10-1.20 for max). Wider bands suit startups where roles evolve quickly.

### 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 Pool Sizing (set during fundraising):
──────────────────────────────────────────────────
Typical pool as % of fully diluted equity (FDE):
  - Pre-seed:  10-15% (small team, large individual grants)
  - Seed:      10-15% (covers first 10-20 hires)
  - Series A:  10-15% (refresh + new hires to ~50 employees)
  - Series B+: 10-12% (refresh + scaling hires)
  - Reserve 25-30% of pool as buffer for unexpected hires

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 Benchmarks (median, Carta data):
──────────────────────────────────────────────────
  - First engineering hire: ~1.5% of FDE
  - 5th hire: ~0.3% of FDE
  - First 5 hires combined (median): ~3.6% of FDE
  - First 5 hires combined (90th pctl): ~17.6% of FDE
  - First 5 hires combined (25th pctl): ~1.3% of FDE

Role Multipliers (relative to mid-level IC baseline):
──────────────────────────────────────────────────
  CTO / C-level exec:     3.0-5.0x baseline
  VP / Director:          1.5-2.5x baseline
  Senior IC (eng/PM):     1.2-1.5x baseline
  Mid-level IC (baseline): 1.0x
  Junior IC:              0.3-0.5x baseline
  Non-technical roles:    0.5-0.8x of equivalent-level technical
```

**Verify**: Total grants for projected hires fit within the option pool. Grants decline consistently with employee number. Technical roles receive larger grants than non-technical at equivalent levels.
**If failed**: If projected grants exceed the pool, either reduce individual grant sizes, negotiate a larger pool at next fundraising round, or prioritize equity for roles most sensitive to equity (engineering, product).

### Step 4: Build the Offer Calculator

**Duration**: 2-3 hours
**Tool**: Google Sheets

Create a spreadsheet that generates a total compensation package for any role given inputs: title, level, geography, employee number, and comp philosophy preference.

```
Offer Calculator Fields:
──────────────────────────────────────────────────
INPUTS (user fills in):
  - Role (dropdown: Engineering, Product, Design, Marketing, Sales, G&A)
  - Level (dropdown: Junior, Mid, Senior, Lead/Staff, Director, VP, C-level)
  - Geography tier (dropdown: Tier 1 / Tier 2 / Tier 3 / International)
  - Employee number (current headcount when joining)
  - Comp philosophy (dropdown: Cash-heavy / Balanced / Equity-heavy)

CALCULATED OUTPUTS:
  - Base salary range: Min / Mid / Max (from salary band matrix x geo factor)
  - Recommended base: Midpoint of band for new hires, adjustable
  - Equity grant: % of FDE (from equity guide by role + employee number)
  - Equity in shares: grant % x fully diluted shares
  - Current value: shares x 409A price (for context, not promise)
  - Projected 3-year value: shares x target valuation / FD shares (scenario)
  - Total comp (Year 1): base + bonus + annualized equity value
  - Total comp (4-year): base x 4 + bonus x 4 + total equity value

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

Comp Philosophy Adjustments:
──────────────────────────────────────────────────
  Cash-heavy:   Base at P60-P75, equity at P25 (lower grant %)
  Balanced:     Base at P50, equity at P50 (standard grant %)
  Equity-heavy: Base at P25-P40, equity at P75 (larger grant %)
```

**Verify**: Calculator produces reasonable total comp for 5 test scenarios (junior engineer SF, senior PM Austin, VP Marketing remote, first CTO hire, 50th employee designer). Totals align with known market data.
**If failed**: Cross-check outputs against Levels.fyi or Pave public data for the same role. Adjust band midpoints or geo factors if results diverge by more than 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 that will apply to all employee grants. [src6]

```
Standard Employee Vesting Schedule:
──────────────────────────────────────────────────
Vesting period:     4 years
Cliff:              1 year (25% vests at 12-month anniversary)
Post-cliff vesting: Monthly (1/48th per month) or quarterly (1/16th per quarter)
Total at cliff:     25%
Total at year 2:    50%
Total at year 3:    75%
Total at year 4:    100%

Example: 10,000 share grant
──────────────────────────────────────────────────
  Month 0-11:  0 shares vested (cliff period)
  Month 12:    2,500 shares vest (cliff)
  Month 13-48: ~208 shares/month (monthly vesting)
  Month 48:    10,000 shares fully vested

Equity Vehicle Decision:
──────────────────────────────────────────────────
ISOs (Incentive Stock Options):
  - US employees only
  - Tax advantage: no tax at exercise if held 1 year + 2 years from grant
  - $100K/year limit on ISOs exercisable in a given year
  - 90-day exercise window after departure (standard; extend if possible)

NSOs (Non-Qualified Stock Options):
  - Anyone (employees, contractors, advisors, international)
  - Taxed as ordinary income at exercise (spread = income)
  - No $100K limit
  - Common for international employees and advisors

RSUs (Restricted Stock Units):
  - Typically Series B+ (need liquidity events for tax settlement)
  - Taxed at vesting as ordinary income
  - No exercise price — simpler for employees
  - Require 409A > $0 and usually a liquidity event within 5-7 years

Early Exercise / 83(b) Election:
──────────────────────────────────────────────────
  - Allow early exercise of unvested options (if company permits)
  - Employee files 83(b) election within 30 days of exercise
  - Starts long-term capital gains clock immediately
  - Risk: employee pays for shares that may not vest (forfeited if they leave)
  - Best for: very early employees when strike price is near zero

Post-Departure Exercise Window:
──────────────────────────────────────────────────
  Standard: 90 days to exercise vested options after leaving
  Extended: 1-10 years (increasingly common; Coinbase, Pinterest, Stripe use this)
  Recommendation: Offer at least 1 year for employees with 2+ years tenure
```

**Verify**: Vesting schedule, equity vehicle, and exercise terms are documented. Legal counsel has reviewed (or will review before first grant).
**If failed**: If the company does not yet have a stock option plan, engage startup legal counsel (Clerky, Gust, or a startup attorney) to create a standard equity incentive plan. Cost: $2,000-5,000 for a standard plan.

### Step 6: Document the Compensation Philosophy

**Duration**: 3-4 hours
**Tool**: Document editor

Write a 4-8 page internal document that codifies every decision made in Steps 1-5. This document is referenced by anyone making or approving offers. [src5]

```
Compensation Philosophy Document Outline:
──────────────────────────────────────────────────
1. EXECUTIVE SUMMARY (0.5 page)
   - Company stage, headcount, and funding context
   - Our position: "We target P[X] for cash and P[Y] for equity"
   - Core principle: "Total comp (cash + equity) is competitive at P[X]"

2. MARKET POSITIONING (1 page)
   - Percentile targets by comp component:
     Base salary: P[X] (e.g., P50 for balanced)
     Equity: P[Y] (e.g., P60 for equity-heavy)
     Total comp: P[Z]
   - Why this positioning (cash runway, equity upside, talent market)
   - When we deviate (critical hires, competitive situations)

3. SALARY BANDS (1-2 pages)
   - Level framework (L3-L6, M1-M2, VP, C-level)
   - Band table for each function (reference Step 2 output)
   - How to place a candidate within a band:
     New to level: Min to Mid
     Experienced at level: Mid to Max
     Exceptional / must-win: Max (requires VP approval)

4. EQUITY GRANTS (1-2 pages)
   - Option pool size and remaining allocation
   - Grant guide by role, level, and employee number (reference Step 3)
   - Refresh grants: annual refresh at 25% of new-hire grant for strong performers
   - Promotion grants: 50% of delta between old and new level grant

5. GEOGRAPHIC ADJUSTMENTS (0.5-1 page)
   - Tier definitions and adjustment factors (reference Step 4)
   - Policy on relocation (adjusted immediately or at next review cycle)
   - International employees: local market benchmarks

6. VESTING AND EQUITY MECHANICS (0.5 page)
   - Standard vesting schedule (reference Step 5)
   - Exercise window policy
   - 83(b) election guidance

7. REVIEW CADENCE (0.5 page)
   - Annual comp review cycle: Q1 each year
   - Re-benchmarking: at each funding round + annually
   - Band adjustments: annually, approved by CEO + board
   - Off-cycle adjustments: retention cases only, requires CEO approval

8. EXCEPTIONS AND APPROVALS (0.5 page)
   - Manager can offer within band: no additional approval
   - Above midpoint: VP approval required
   - Above max of band: CEO approval required
   - Equity above guide: board approval required
```

**Verify**: Document covers all 8 sections. At least 3 people (CEO, hiring manager, advisor/board member) have reviewed. Document is stored where all hiring managers can access it.
**If failed**: If the document feels too complex for the current stage, start with sections 1-4 only (executive summary, market positioning, salary bands, equity grants). Add remaining sections as the company scales.

## Output Schema

```json
{
  "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, and 83(b) guidance", "required": true},
    {"name": "comp_philosophy_doc", "type": "document", "description": "4-8 page internal document codifying all compensation policies", "required": true},
    {"name": "409a_valuation", "type": "document", "description": "Current 409A valuation report for strike price determination", "required": false}
  ],
  "expected_row_count": "1 framework (covers all roles)",
  "sort_order": "N/A",
  "deduplication_key": "company_name + effective_date"
}
```

## Quality Benchmarks

| Quality Metric | Minimum Acceptable | Good | Excellent |
|---------------|-------------------|------|-----------|
| Roles with defined bands | > 80% of hiring plan | 100% of hiring plan | 100% + future roles |
| Benchmark sources used | 1 source | 2 sources | 3+ sources with cross-validation |
| Offer acceptance rate | > 60% | > 75% | > 85% |
| Time to generate offer | < 2 days | < 1 day | < 2 hours (calculator) |
| Comp philosophy coverage | Salary bands only | Bands + equity + geo | All 8 sections documented |
| Pay equity variance | < 20% unexplained gap | < 10% gap | < 5% gap |

**If below minimum**: If offer acceptance rate is below 60%, bands are likely below market — 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

| Error | Likely Cause | Recovery Action |
|-------|-------------|----------------|
| Offers consistently rejected | Bands set below market or equity not valued by candidates | Re-benchmark with 2025-2026 data; present equity value scenarios more clearly in offer letters |
| Option pool exhausted before plan | Grants too generous early or pool undersized | Request board approval for pool expansion at next board meeting; reduce new grants until expanded |
| 409A valuation expired or missing | Valuation older than 12 months or new funding round completed | Commission new 409A valuation immediately ($1-5K); do not issue grants until complete |
| Geographic tier disputes | Employee relocated or works from different location than expected | Apply relocation policy from comp philosophy; adjust at next review cycle, not retroactively |
| Board rejects equity grants | Grants exceed approved pool or not on plan | Verify all grants fit within approved pool before presenting; batch approvals quarterly |
| Candidate negotiates above max of band | Role is under-leveled or market has moved | Re-evaluate level assignment; if correct level, cap at max and add signing bonus instead of inflating band |

## Cost Breakdown

| Component | Free Tier | Startup Tier | Scale Tier |
|-----------|-----------|--------------|------------|
| Salary benchmarking | Levels.fyi + Glassdoor ($0) | Pave free + Carta basic ($0) | Carta Total Comp or Option Impact ($5-15K/yr) |
| Cap table management | Spreadsheet ($0) | Carta Launch (free for startups) | Carta full platform ($3-8K/yr) |
| 409A valuation | N/A (required) | Carta 409A ($500-1,500) | Independent firm ($2-5K) |
| Legal (equity plan) | Template from Clerky ($500) | Startup attorney ($2-5K) | Full comp counsel ($5-10K) |
| Offer letter templates | Google Docs ($0) | Gusto/Rippling templates ($0) | HRIS with offer management ($50-200/mo) |
| **Total (Year 1)** | **$500-1,500** | **$2,500-7,000** | **$15,000-35,000** |

## Anti-Patterns

### Wrong: Setting equity grants based on gut feel per candidate
Individual negotiation of equity grants without a framework creates wildly inconsistent cap table entries. Employee #8 with 0.8% and employee #12 with 1.2% for the same role and level creates resentment when employees inevitably compare notes. [src3]

### Correct: Use the equity grant guide consistently
Every offer references the equity guide matrix. Grants are determined by role, level, and employee number — not by negotiation leverage. Exceptions require CEO approval and must be documented.

### Wrong: Promising equity without a board-approved stock option plan
Verbal equity promises or offer letters referencing grants before the board has approved an equity incentive plan are unenforceable and create legal liability. Candidates who accept based on these promises may later discover the grants cannot be issued. [src6]

### Correct: Establish the equity plan before the first hire
Engage legal counsel to create a standard equity incentive plan before making any offers that reference equity. Cost is $2-5K and takes 2-4 weeks.

### Wrong: Using a single national salary for all geographies
Paying Bay Area rates to an employee in a Tier 3 market overspends on that role. Paying Tier 3 rates to a Bay Area employee guarantees rejection. Either approach wastes resources or loses candidates. [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 the comp philosophy and apply consistently to all offers.

## 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 document — not a one-off salary decision for a single hire.

## Related Units

- [Cap Table Management](/business/fundraising/cap-table-management/2026) — cap table accuracy is a prerequisite for equity allocation
- [Equity Dilution](/business/fundraising/equity-dilution/2026) — understanding dilution mechanics before sizing the option pool
- [Founder Vesting](/business/fundraising/founder-vesting/2026) — founder equity structures complement employee equity design
- [Series A Readiness](/business/fundraising/series-a-readiness/2026) — investors evaluate comp structure during due diligence