How to create an attractive startup compensation model

For startups, cash flow is the ongoing make it or break it moment. Before you’ve been funded, you may be burning through your own personal savings and when there’s no such thing as a sure thing, each month that passes gets you both closer to the likelihood of success and just as equally, failure with a fast-dwindling bank account—you never really know which. And then, once you’ve raised money, your dollars now belong in part to someone else. If you thought spending your own money was stressful, wait ‘til you as the founder have someone else you’re obligated to, on top of customers, on top of the ever-mounting pressure you put on yourself. Protecting cash flow is one of your top priorities as a founder and it seems to clash with the very prospect of growing a company when what you need is to hire employees to get you there, your other top priority. And when you get to the end of the arduous process that is recruiting, to actually making the offer to your dream candidate, up comes the very important question of: what do you pay them? Will they say yes? 

Because of this constant and watchful eye on cash most startups offer lower total compensation packages than established corporations, though certainly not all depending on a variety of factors such as location, funding, and industry. And on top of being able to pay market rate or above salaries, established companies often offer extensive benefits and health coverage, stocks that have actual value and not just a hope of value, and sometimes a range of perks like the playground-like offices decked out with napping pods, smoothie bars, and free workout classes. What about you and your startup? How could you possibly compete?

Figuring out how much to pay someone is tricky. You’re making a statement about their worth and in a worst case scenario, you may come out cruel, manipulative, cheap, insulting. But, in a best case scenario, you can both agree on what that worth is. So let’s cover how to create a startup compensation model that attracts talent and keeps your startup healthy enough to keep going.

Startup compensation: You’re starting from scratch

Just like Silicon Valley threw out the rules of what offices should look like, there are no rules when it comes to offering attractive compensation models, especially now that remote work has become much more widely accepted and adopted. Startups have the ability to hire from anywhere as long as they are legally set up to do so, therefore broadening what we define as “market rate”. Unicorn candidates don’t just exist in small localized bubbles; your compensation package may very well be barely market rate, on the low end compared to Silicon Valley startups, but that same compensation package may be a dream come true for someone who lives in rural Oregon. (In fact, more startups now than ever before are located outside of Silicon Valley, a not so coincidentally very expensive place to live.) 

You should also understand the mindset and psychology of someone who is applying to an early stage startup, especially pre-raise. They could be working at a company that offers more security and a more established name, but they’ve decided to apply at your startup. Why? As a founder, you can leverage this to understand where they’re coming from and what they’re really looking for so that you can work together in a way where both parties are happy and you can keep your startup budget healthy. Hint: many companies are failing to understand what employees really want and there’s a big appetite right now to rethink how we collectively approach work, so here’s your chance to shine. 

Here’s what to consider:

What to include in your startup compensation package


This one’s obvious, isn’t it? Though it’s probably not uncommon for founders (term used loosely) with startup stars in their eyes to try to offer compensation solely in the form of equity, by now, those requests should be treated as spam because most startups fail anyway and 50% equity of a failed company is still $0. Here’s hoping you’re one of the ones that make it, but let’s be realistic: you’re working against the grain, not with it. You should always be paying your employees some form of a salary. 

Learn more about how to determine salaries, including alternative compensation models for startups on a budget in our article here .


Equity is ownership in a company, usually offered in the form of stocks or stock options and represented as a percentage of ownership. Equity is a common form of compensation in startups and this is usually what people think of when they think of big cash payouts in the startup world when shares hold value after a company sells (a.k.a “the exit”) or when the company goes public on a stock exchange through an IPO. 

Learn more about offering startup equity in our article here .

Profit sharing

Profit sharing is a percentage of company profits that’s paid out to employees at specific intervals with no attached equity (although it’s possible to offer both equity and profit sharing as compensation). Nathan Barry, founder of ConvertKit, details why he chose profit sharing as compensation, in this article here. Essentially, equity for a company that doesn’t have an exit plan and isn’t planning on going public may not be the best financial incentive for employees.


Standard benefits include health insurance and paid time off. Less common for early stage startups are benefits like retirement plans, life insurance, and parental leave, but offering them as a startup could be a competitive advantage especially in appealing to people who may avoid leaving jobs at traditional companies for those benefits. Note too that certain benefits are required depending on your location. For example, in the US, employers hiring W-2 employees must offer unemployment insurance, social security, medicare, and worker’s compensation.

Companies that offer benefits packages and programs to startups include Catch (for independent workers), Bennie, and Rippling. If you’ve raised funds with an investment firm, they’ll likely have a partner or suggestions and can advise on setting up benefits operationally for your employees.

Time off

Time off includes vacation pay, sick pay, and for some companies, even bereavement leave, paid time off to volunteer or extended time off. Many startups now offer unlimited vacation but there have been studies criticizing the practice because employees actually end up taking less time off, so consider a minimum number of vacation days instead. Depending on where you hire, you may need to consider regional laws mandating a minimum number of vacation and/or sick days, and apply that across the board for all employees.

Work flexibility 

Many people choose to work at startups to experience a variation of the 40+ hour 9-5+ workweek. That could be out of personal preference or because it suits a specific need for their lifestyle and situation. If you don’t need people to clock in at 9 and clock out at 5, play that up as a selling point from the job posting, and note what hours aren’t flexible if you need time together as a team. (Just make sure you don’t go too far in the other direction and start equating flexibility to overworking.) Then, consider benefits and perks that support flexible work, such as:
  • A home office stipend
  • A coworker space stipend
  • A travel stipend to meet up with fellow remote teammates
  • A coffee shop stipend like what Buffer does

Training and professional development 

This doesn’t have to be formal; any strict model of training may be out of date in a few months anyway in a fast-growing startup environment. Shopify offers free store accounts to all employees as a way to get to know the product and build empathy for customers while driving the entrepreneurial spirit that is part of the core mission of the company. And with startup roles and lines blurring where people jump from one thing to the next, it doesn’t even have to be product-specific. Think outside the box. How can you build in benefits and perks that enable employees to grow, learn, and maintain that curious spirit that’s so critical to startup success? After all, you put all that effort into recruiting. You want them to not only stay, but to stay and help drive continuous growth—a kind of growth that doesn’t happen with stagnant minds at the helm. You don’t have to be prescriptive about it, either: companies like Slack, Helpscout, and Hoppier offer annual learning and professional development budgets while other companies offer a case-by-case or monthly stipend. 

Some benefits and perks related to professional development include:
  • A book stipend
  • A budget for conferences
  • Unlimited access to company software/product
  • Language classes (i.e. Berlin-based Caseable offers a German learning stipend)

Wellness and mental health

When the aim is to be so disruptive that a new market opportunity is uncovered and growth is the goal, speed often comes paired with volatility. Anyone and everyone can feel challenged with mental health regardless of where they work, but a startup environment can pose an even greater challenge. High performance isn’t just about doing as much work as possible; it’s about building resilience, maintaining employee engagement, and supporting wellbeing.

Some benefits and perks related to wellness and mental health include:
  • EAP (Employee Assistance Programs) services
  • Mental health care assistance offered through platforms like Akira
  • A gym stipend
  • Fitness classes
  • Subscriptions to mental health and wellness apps and services

On compensation strategy

This is just a non-exhaustive list of ideas for what to include as part of your compensation model. Research what other companies are doing, ask fellow founders, really think about what people want and need to do their best work. You don’t have to overdo it, either. Go back to your company mission and values. Just as they drive overall business strategy, they’ll drive compensation strategy. And your compensation strategy becomes part of your overall employer brand, both a powerful recruiting and retention tool. A mission and values that people connect with is in itself a strong motivator for choosing to work for a company—an intangible benefit, you could say. Now, you can’t get away with not paying people salaries nor should you try to but instead, think of benefits or perks as an extension of your company’s values to round out needs like salary and health insurance. Some of these things are—good news!—even free or very low cost for you as the employer but can really add up to mean a lot more than fancy offices. 

A few final tips:
  • Consider diversity and inclusion: We go over building a more equitable and diverse workplace from the very start in more detail in this article but when it comes to compensation, as a prime example, consider the impact a lack of parental leave can have on your candidate pool.
  • Have a calculated approach to compensation: With increasing pressure overall on employers to be transparent about pay, it’s important not to wing your compensation strategy and to give it serious thought, do your research, and be able to back it up. This avoids back and forth later on when you need to backtrack to fix gaps.
  • That said, you can change your mind: Put that startup agility to good use and get feedback on your compensation package from your team as you start to build it out. What’s working? What isn’t? Test and iterate. 
  • Speak with your accountant or HR advisor when putting together a compensation package. Many perks can help to reduce corporate taxes and you, startup founder, can use all the cash flow help you can get.

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