Entrepreneurship, Second Edition

6.5. Compensation

As resource constrained as new ventures are, you are likely hard-pressed to think about compensation for you and your team. At some point, however, you'll need to pay yourself and others in your organization. The more powerful your team members, the more compensation they will expect, whether that is in salary or in equity (but usually a combination). So how does a startup company determine what to pay its employees? How does it choose among wages, salary, bonuses, equity, or some combination of these options? The answers to these questions depend not only on the nature of your company but also on the nature of your team and employees.

6.5.1. Equity

There are several good reasons why most new ventures distribute equity to at least some of their employees. First, new companies often can't pay market rates for salary and wages. Equity can induce people to work for below-market rates with the expectation that at some point in the future they will be handsomely rewarded. As Lalitha Swart of Silicon Valley Bank put it, "People don't leave large corporations and take on risk without knowing there is an upside in stock."^[] Second, including some equity in the compensation package aligns the employee's interests with those of the company. Basically, the employees become owners, and their stock or options increase in value as the company prospers. Finally, the sense of ownership boosts morale, as employees perceive that everybody is in this together. This added camaraderie ...