Recently I was talking to an entrepreneur about salary and equity for early employees in a startup. After we went back and forth for a bit, he offered up something that they do in his company that I hadn’t heard: before institutional funding, the first 10 engineers all get the exact same salary. Now, the equity compensation differs based on experience and expertise, but the immediate cash compensation is all the same. Once the startup raises their first round of institutional capital, the salaries are leveled up to market rates for the respective positions (they had already raised a solid seed round).
Here are a few reasons why they do this:
- Requiring a pay cut for every engineer ensures that they are bought in on building a company, and not just taking a paycheck
- Limiting pay initially creates more focus and dialogue around the equity component, resulting in greater belief that the equity will be worth a substantial amount
- Keeping all salaries the same makes it so that everyone knows what everyone else makes, and ensures that they are pulling their own weight
While it’s harder to build a team this way, I’m sure that once it’s assembled the team members have a greater level of commitment and work harder to achieve success.
What else? What are some more thoughts on the idea of the same salaries for the first 10 engineers before institutional funding?
David Cummings on Startups 
In combination with http://www.slicingpie.com, that might be an interesting way to do it.
Hiring 10 engineers pre-institutional capital is not common. But when it happens, I’d question whether the equity compensation the 10th engineer gets accounts for the cut in salary he or she is taking (I doubt it).