One of the things I come across constantly while working with startups is the subject of fair pay and equity. This can be one of the most disruptive aspects of growing a startup, and the decisions you make today can have implications for the success of your company for years to come.
First of all, the rule of management - especially in startups - is simple: pay people what they're worth. And when I say "pay", I'm including both salary and equity. What they're worth is dependent on two factors: how much value they bring to your company, and salary levels in your industry and location. That's it - everything else is negotiation, but if you start with those clear factors in mind and make them the starting point for your salary negotiations, you'll never go wrong.
Here's some of the hurdles you may come across, and how to deal with them:
1. Hoarders: A Founder / Management Team Who Hoards Cash and Equity. This is more common than you might think, and is something I've run into a lot. It's not usually because the founder or management team is greedy, it's often simply because startup leaders tend to be very binary about cash and equity. Everybody's trying to get it, and it's your job to protect it. While cash is king in startups, many early management teams misinterpret lowering salary expenditure with fiscal responsibility. It is not - quite the opposite, it's irresponsible because these kinds of cost reductions hurt your company's ability to sell, deliver, and so on. You can usually identify these companies very quickly - they have no options plan for employees and pay staff below market value. As a result, they are usually filled with underperformers and unmotivated staff who are only there because they cannot go somewhere else. Not surprisingly, these types of companies are very unlikely to succeed.
If you're one of these hoarders, it's not hard to turn this around and re-energize your team. Startup salaries tend to be lower due to cash constraints, but there are many ways to keep staff engaged and motivated. Build and maintain a fair options plan and let everyone share in the success of the business. Take a hard look at your local market and adjust your salaries accordingly. Tie salary increases to simple but tangible performance milestones. It all sounds like boring HR, but in a startup these things are essential to creating a team that can clobber your competition.
2. Mismatched Expectations: Dealing Mismatched Salary/Equity Expectations. Again, this is common in every startup, especially those with staff that don't have a lot of experience in startups. Let's start with the employee who expects more salary/title/equity than they really deserve. Again, this usually isn't out of greed, more often it's because they have been given so much responsibility at the startup (where everyone wears many hats) they they overestimate their contribution in a larger organization. The key to dealing with employees like this is to show them the path, and be honest and direct with your reasoning. I like to show all employees the path to growth (what I'm thinking about for hiring plans and funding, for example) and invite them to see where they would like to fit within that much different and larger company. Sometimes, eager employees will immediately say, "I want that VP job, or the new COO job, etc" when their skill base doesn't qualify them for that role. Employees like this are usually exactly what you want in a startup - your job as a leader is to show them there is a path to get there, and outline all of the things that are expected of a person in that role, and how you will help them attain these skills. Then the role becomes a goal, rather than an expectation.
You also see this mismatch in founder teams, where people have a disproportionate amount of equity based on their contribution. This is very common and will usually get dealt with in the fundraising process eventually - usually at the cost of a founder - so it's best just to deal with it up front. Founder teams need to be careful about how they split up equity - they may all feel equal when they're not, or they may offer a disproportionately small equity stake to a "late founder". The reality is that some founders take more risk than others, and some bring more to the table than others. Other times it may be a question of less tangible contributions. Often, everyone has a sense of solidarity in the startup's early days and things feel equitable, and if the risk is truly shared then this is easy to deal with later on. But if founders' contributions are not equitable, then your cap table must reflect this at the outset. Otherwise, discontent will follow and your company will suffer for it; either in a founder exit (resulting in non-working shares) or a forced equity adjustment at your next funding round. The key here is to be transparent among founders and discuss these contributions early on.
The other side of the coin is where an employee is over/undercompensated due to some internal issue, such as a personality conflict with one of the founders. Again, this is quite common, but is much more difficult to deal with. When I help restructure a startup, this can be one of the most disruptive activities because no matter what you decide, you're going to get somebody very upset. This is precisely why most startups don't address it, and let it fester until it becomes a much larger problem down the road. The only advice I can give you is to deal with it now, as it will slowly eat away at your business, demotivate staff, and make you less competitive. Have a third party come in to deal with it, or take it on yourself, but deal with it now or you'll regret it at some point.
3. The False Deal: Thinking You're Getting a Deal With Undercompensation. I'll admit I've been suckered into this. I once had a VP R&D who was a friend of an investor. He had been through a successful exit and didn't require a lot of salary. He was a great guy, easy to get along with and didn't want a ton of equity. To me it sounded like the perfect combination. Only it wasn't - it was a total disaster. As the company grew, it rapidly outgrew his management capabilities, and it became apparent that he was unhappy with his salary deal as he hired people at a much higher level than himself. Then came the grumbling, the conflict, and the kind of unrest that eats your company from the inside. New to the startup game, we didn't deal with it head-on, just kept on making adjustments that weren't really addressing the issue. Resentment grew on both sides, and the negative attitude permeated both management and R&D teams into an "us vs. them" mentality. The company's productivity went way, way downhill. In the end it cost a lot more than just a friendship between early founders, it took our eye off the singular focus of building a great company and all the things that come with that.
If you're in a startup, it's very likely you have that situation playing out right now. If you think you're getting a deal by underpaying someone, you're not. Recognize it for what it is and deal with it. Now. Sure, everyone takes a bath on compensation pre-funding, but once you're a functional startup with enough cash to take care of your employees, then do it. The undercompensation deal ends when you have the cash to remedy it. If the employee isn't the right guy for the role, then change the role, but undercompensation is a tool that can only be used sparingly, and only under specific circumstances. If you're doing it now, then ensure to create a clear path to prosperity, a light at the end of the tunnel for employees. To do otherwise will create a cancer in your company that can take years to remedy.
4. Priorities: Take Care of Your Employees First. When I was a kid, a pretty shrewd businessperson gave me this advice: "In business, always pay yourself first". Now that I've been through the startup wringer a few times, I've built on this to say: "In a startup, take care of your employees first." As a founder/CEO, they're the lifeblood of your company, not you. It took me a while to realize this myself, and there was a lot of trial and error along the way. But if you focus on them, everything else falls into place.
Like all things, it's all about priorities: if any of the above points sound familiar, then forego that PR stint at the Governor's Mansion - it may help you personally but it's not really going to help your business in any tangible way. Ignore that pay-for-play conference speaking slot. Get yourself out of first class and go to coach where every other startup CEO sits and invest those dollars in your employees. Stop paying marketing people to come up with new vaporware ideas and spend your capital on building capacity for delivery. Stop wasting your time on trying to be a visionary if you don't have the staff to execute. Solving your startup employee problem will ensure your company can deal with almost anything the market or the competition throw at it, then it'll be the right time to do the PR and the First Class flights.
Build from the inside, rather than from above, and you'll have an infinitely better chance at success.
Michael is the former CEO of the Global Reporting Initiative, Carbonetworks, and other sustainability organizations. He has been an advisor and CEO in sustainability for almost 20 years, and writes about technology, sustainability, and social innovation.