How to Set a Compensation Philosophy
Before Your First Hire

Most startups make compensation decisions reactively — whatever it takes to close the candidate. The result is an inconsistent pay structure that causes resentment, drives attrition, and is expensive to unwind. Setting a clear philosophy before you hire takes an afternoon and saves years of headaches.

Why It Matters Before Your First Hire

Compensation decisions compound. The salary you offer your first engineer sets an anchor for the second. The equity percentage you give your first VP sets expectations for every VP after. The inconsistency between what two people in similar roles earn — discovered eventually, always — creates resentment that no amount of culture work can offset.

A compensation philosophy doesn’t need to be complicated. It needs to answer four questions consistently so that every offer you make is defensible, and every employee who learns what a colleague earns understands the logic even if they don’t love the number.

The Four Decisions Your Philosophy Must Make

1. Where do you want to sit relative to market? The most common options: 50th percentile (market median — competitive but not premium), 75th percentile (top of market — attract the best, highest burn), or below-market cash offset by equity (common at very early stage when cash is constrained but equity is meaningful).

2. How do you handle equity? What percentage range for each level, what vesting schedule, and what triggers acceleration. See our equity guide for the full framework.

3. Is pay location-adjusted? Do you pay the same salary regardless of where someone lives, or do you adjust by cost of living or local market? Both are defensible — inconsistency is not.

4. How transparent are you about pay? Full transparency (everyone knows everyone’s salary), band transparency (we share the band for your role, not individual salaries), or opacity (we don’t discuss compensation). Each has tradeoffs — opacity is increasingly untenable in competitive hiring markets.

Setting Your Market Position

At seed stage with limited runway: below-market cash with meaningful equity is defensible and honest. The candidates who accept it are bought in on the mission and the upside — which are often the best early hires. Paying at the 50th percentile in cash with 75th percentile equity is a coherent position. Paying at the 75th percentile in both is expensive and unsustainable before product-market fit.

At Series A with capital deployed: 50th–75th percentile in cash with 25th–50th percentile in equity (smaller grants as the company de-risks) is the standard position. Use our free Compensation Band Builder to set ranges by role using live market data. Levels.fyi, Glassdoor, and Radford are the most reliable external benchmarks for tech roles.

Equity — The Framework

Standard early-stage equity ranges by role: founding engineer 0.5–1.5%, senior individual contributor 0.1–0.5%, manager/director 0.25–0.75%, VP 0.5–1.5%, C-suite (non-founding) 1–3%. These compress significantly post-Series A as the company’s valuation increases. Communicate equity as a percentage of fully diluted shares, not as a number of options in isolation — a number without context is meaningless.

Standard vesting: 4 years, 1-year cliff, monthly vesting after. Double-trigger acceleration on acquisition (equity vests if the company is acquired AND the employee is let go or their role materially changes) is worth fighting for, especially for early hires. It’s increasingly standard and shows the team you’re looking out for them in an exit scenario.

Location-Based Pay

Three coherent approaches: location-agnostic (everyone earns the same salary regardless of where they live — attracts the best talent anywhere, expensive in low-cost markets), zone-based (3–4 geographic zones with different pay bands — Stripe and GitLab use variants of this), local-market (pay local market rates — complex to administer, creates significant pay gaps between colleagues doing the same job).

At seed stage with a small team: location-agnostic is simplest and most equitable. At Series A with a distributed team across multiple countries: zone-based becomes worth the administrative overhead. Whatever you choose, document it and apply it consistently from the first hire.

Building Salary Bands That Scale

A salary band is a range (min, midpoint, max) for a given role and level. The midpoint is your target market position. Min is roughly 80% of midpoint, max is 120%. New hires typically start at 90–100% of midpoint. People progress toward the max through performance, not tenure. When someone hits the max, they’re either overdue for a promotion or the band needs to be refreshed against current market data.

Review bands annually at minimum — more frequently if the market is moving fast. A band that was accurate 18 months ago may be 15–20% below current market in competitive engineering roles. The cost of a below-market band is attrition, which is always more expensive than a pay adjustment would have been.

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