Compensation
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Compensation

🔖 Contents on this page:

🏦 Compensation basics

  • It often helps to obtain market benchmarks (in similar stage & geography) - check out some benchmarks on Angel.co, Glassdollar, or our analysis below.
  • Internal consistency: Be aware that at some point (probably not at the very early stage) employees within the organization find out how much their teammates earn, increasing the importance of a justifiable compensation plan
  • Employee background & resulting preferences: Keep in mind that risk appetite differs between employees based on their character but also their living situation. Take the example of a family mother that has to pay a mortgage vs. an independent graduate with no debt.
  • The earlier the startup, the more pronounced employee's entrepreneurial tendencies need to be.
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A compensation package normally consists of two components: Salary (fix + bonus) + Stock Options

💰 Compensation break-down

💸 1. Salary

  • Especially with early stages companies, salaries should be able to cover immediate and rather basic needs. Anything beyond that should be covered by stock options.
  • It often helps to relate pay raises to funding rounds
  • Founder salaries vary from zero (however, less likely nowadays) to EUR 200k (in case of scale-ups)
  • Senior hires over time often earn significantly more than founders (we have seen compensation requests exceeding EUR 300k - ignoring any stock options)
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Salary averages within b2venture’s portfolio (stage and location agnostic)*

📈 2. ESOP / VSOP

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ESOP programs are crucial to acquire and retain top talent. While they motivate employees and create a sense of unity and mission moreover, they should be treated as a precious currency. If not used wisely and thoroughly, they might evolve into a very expensive tool.

Compensation Philosophy: Stock option socialism vs. Capitalism

There are different schools of thought in the fields of ESOP distribution approaches. Some founders allocate stock options to every single employee and others do not allocate any at all. Looking at our portfolio, all our companies run some kind of employee incentivization program - for very good reasons. However, to varying extents.

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In the interview process when negotiating compensation, demonstrate the potential value appreciation after a future funding round and emphasize the upside scenarios. BUT be careful not to over-hype as this can damage your credibility and set unrealistic expectations.

It often helps converting the options into yearly attributed €-values, assuming different valuation scenarios.

  • The stock option % designated to different positions very much depends on
    • Seniority, uniqueness and relevance of the employee
    • Phase and thus valuation of the company (the later the smaller the %)

      • It is thus difficult to attribute certain stock option packages to different roles. For specific advice you should get in touch with us and we can provide you with some more specific benchmarks. A first guiding rule is that the monetary yearly stock option value normally amounts to 40-80% of salary - again this depends on role and seniority and employee preferences.

  • We urge founders to set the strike price (the employee option purchase price) as low as possible, as this maximizes the upside per stock option.
  • Generally, we deem a 4 year vesting schedule, including a 1-year cliff, as suitable. This is very much in line with market standards.
  • For senior (mostly C-level) hires, including founder vesting, we more often see a so-called loyalty cliff of two years. In this case, an employee-initiated leaver within two years after investment corresponds to a Bad Leaver.

🐻 Compensation in a challenging market environment

In a challenging market environment, start-up compensation can become a complex issue. With increased competition, salary development may be affected as companies strive to attract and retain top talent despite limited resources. Start-ups may consider implementing measures such as founder salary waivers or deferrals, especially in the early stages, to manage financial constraints.

It's also crucial to manage expectations, particularly concerning the € value derivation of stock options. Often, the last post-money valuation no longer reflects the current reality, which can inflate option prices. Companies should ensure that the potential value of stock options is communicated transparently and realistically to avoid misunderstanding and disillusionment.

📚 Helpful tools to calculate ESOP and compensation

Compensation

ESOP / Stock options

Thoughts? Feedback? Something missing? Please let us know: andreas.goeldi@b2venture.vc