Startup Compensation and Equity: Paying Your First 10 Hires

Startup compensation for your first 10 employees usually pairs below-market cash with a stock option grant, sized by role, seniority and how early the person joins. Carta's analysis of grants made from June 2023 to June 2024 found a median of 1.49% of fully diluted shares for the first hire. The right mix for you depends on your runway and the role.

Most founders don't get compensation wrong on offer one. They get it wrong on offer four, when the first three people compare notes.

This guide offers one system for setting cash bands, sizing equity grants and explaining the offer, so candidates say yes with clear eyes. If you are making your very first hire, pair it with our step-by-step guide to how to hire your first employee, which covers the process and the legal setup.

What startup compensation and equity actually is

Early-stage pay has two parts that behave very differently. Cash is certain, immediate, and comes out of your runway every month. Equity, usually granted as stock options at this stage, is uncertain, deferred, and comes out of your ownership rather than your bank account.

Options give an employee the right to buy shares at a fixed strike price, set at fair market value by a 409A valuation, once they vest. If the company grows, the spread between the strike price and the future share price is the employee's upside. If it doesn't, the options are worth nothing. That's why we like presenting cash and equity as a trade, not as two separate line items.

The goal of a compensation system isn't to pay the least. It's to pay in a way that is consistent, explainable, and attractive to the people who will do their best work in a small, risky company.

Why a written compensation system beats ad hoc offers

Most founders negotiate their first few offers one at a time. Candidate A gets more salary because they pushed. Candidate B gets more equity because the founder liked them. Months later the team compares notes, and the inconsistencies turn into a trust problem.

A simple system, written down before offer number two, answers three questions:

What is the cash band for each role and level?
What is the equity band for each role and level?
How can a candidate trade between the two?

A system also protects your option pool. Carta's option pool guide (updated August 2026), citing HSBC Innovation Banking's UK-focused Venture Capital Term Sheet Guide 2026 (643 of its 711 term sheets were for UK-headquartered companies), says the most common pool in those deals is 10% to 15% of the company, with 10% the most frequent. Carta recommends matching the pool to your hiring plan for the next 12 to 18 months.

Carta's early-hire analysis adds a useful fact: granting median-sized equity to all of your first 10 hires uses less than 5% of the company. So a pool that runs dry early is usually a sign of improvised, oversized grants. The top-up that follows dilutes founders and early investors. Our option pool strategy guide covers sizing and negotiating the pool itself.

How to set startup salary bands by role and stage

Start with a market reference for each role (salary surveys, peer founders, your investors' portfolio benchmarks), then apply a stage discount. Common patterns for a US team:

Pre-seed: cash well below market, often capped by what the founders pay themselves. Kruze Consulting's payroll data puts the average founder salary at seed-funded startups at $147,000 in 2025; pre-seed founders frequently pay themselves less, or nothing.
Seed: cash closer to market but still discounted, with equity making up the gap. For reference, Carta's H1 2025 report put the average new-hire salary at startups at $189,000 for engineering and product roles as of June 2025, and smaller companies typically pay less.
Post-Series A: cash approaches market, and new equity grants shrink accordingly.

Both sides of the package are still rising. Carta's H2 2025 compensation report, published in May 2026, found that median salaries for individual contributors rose 6.4% and median initial equity grants rose nearly 11% over the prior two years, with data running through February 2026.

Write each band as a range with a midpoint, and make the midpoint your default offer. Go above it only for a documented reason: rare skill, a competing offer, senior scope. Our test: if you couldn't explain the reason to the rest of the team, it probably isn't a good enough reason.

Remote teams often use two or three location tiers rather than city-by-city pay. Bands also make pay transparency laws easy to follow, since several states require a pay range in job postings; our startup recruiting guide lists the main ones.

How to size startup equity for employees

Equity is where the stage discount gets repaid. The earlier someone joins and the more risk they take, the larger the grant. SaaStr's January 2026 summary of Carta's Winter 2025 State of Seed report shows median grants of 1.50% for hire one, 0.85% for hire two, 0.50% for hire three, 0.44% for hire four, and 0.33% for hire five, with wide ranges around each (0.50% to 4.00% for hire one).

The ranges below are an illustrative starting point consistent with that curve, not a rule. Market data changes.

Hire order	Engineer / product	GTM / operations	Executive level
Hires 1 to 3	0.5% to 2.0%	0.3% to 1.0%	1% to 3%+
Hires 4 to 6	0.3% to 0.8%	0.15% to 0.5%	1% to 2%
Hires 7 to 10	0.15% to 0.5%	0.1% to 0.3%	0.5% to 1.5%

Carta notes that engineering roles tend to land at the higher end of ranges and business roles at the middle or lower end. All figures are fully diluted percentages: the grant divided by all outstanding shares, plus the option pool, plus any SAFEs or notes expected to convert.

Quote grants as a number of shares, and share the fully diluted count so candidates can do the math. A percentage without a denominator is a red flag to experienced candidates. It sounds generous and means nothing. Our investor's guide to cap tables shows how investors read the same numbers.

Two more sizing habits we find useful:

Anchor to dollars, carefully. A 0.5% stake in a company with a $10M post-money valuation looks like $50,000, but that headline valuation reflects preferred stock. Common stock is typically valued lower, and the option's value is the spread above the strike price. Show candidates a range of outcomes, not one inflated number.
Reserve for refreshes. Many founders keep part of the pool unallocated so they can top up strong performers after two or three years, instead of watching a fully vested team walk away.

Vesting, cliffs, 83(b), and the fine print

The most common schedule is still four years with a one-year cliff, vesting monthly after the cliff. We've written before that settling vesting early saves pain later (our take on splitting equity fairly), and the same logic applies to employees. Variations worth knowing:

Acceleration. Rare for non-executive employees. Where it appears, usually for founders and executives, double trigger (vesting accelerates only if the company is acquired and the person is terminated) is the more common form.
Post-termination exercise windows. Cooley GO notes that options at US startups typically allow exercise within three months (or less) after employment ends, because incentive stock options (ISOs) generally cannot be exercised more than three months after termination and keep ISO treatment. Some companies offer longer windows as a benefit, and Cooley warns that extending the window on an existing ISO is a modification that causes loss of ISO status. Explain the trade-off rather than just advertising "10 years."
Early exercise and 83(b). Early exercise combined with a Section 83(b) election can reduce taxes for early hires. As Goodwin explains, the tax code requires the election within 30 days of the transfer, with generally no exceptions, and the IRS now accepts Form 15620 online. Mention it, then send employees to a tax professional rather than advising them yourself.

Under standard equity plans and corporate law, each grant needs board approval under a proper equity incentive plan. Handshake equity is among the most common problems that surface in due diligence. A promise over coffee isn't a grant. It's a future dispute.

How to explain equity to candidates

Many candidates, even experienced ones, don't fully understand how options work. In our view, founders who spend ten minutes on the mechanics close more offers and avoid resentment later. Cover five points:

The number of shares and the fully diluted total, so they can compute their percentage.
The strike price and where it came from.
The latest preferred price and valuation, clearly labeled as the investors' price, not the common price.
The vesting schedule, the exercise window, and what happens if they leave.
Two or three outcome scenarios with rough after-dilution numbers, labeled as illustrations rather than promises.

Worked example: what a 1% grant could be worth

As an illustration, say your company has 10,000,000 fully diluted shares and you grant 100,000 options (1.0%) at a $0.40 strike price from your latest 409A. Exercising all of them would cost $40,000.

Assume two more funding rounds that each dilute existing holders by 20%. The employee's stake falls to 0.64% (1.0% x 0.8 x 0.8), and the company has 15,625,000 shares at exit.

Exit value	Price per share	Value of 100,000 shares	Gain after $40,000 exercise cost
$0	$0	$0	$0 (options expire unexercised)
$50M	$3.20	$320,000	$280,000
$200M	$12.80	$1,280,000	$1,240,000

These figures are before tax and assume all preferred stock converts to common, which is typical in a large exit. In a smaller sale, liquidation preferences can shrink or wipe out what common holders receive. Say that out loud. Candidates remember who was straight with them.

Put it all in writing alongside the offer. Our guide to the employee equity offer letter includes a template. Candidates will forward the offer to a friend or partner, and a clear one-page summary means that person explains it accurately.

You don't have to publish every salary, but you should be able to explain your system to any employee who asks. A practical middle ground: share bands and levels internally, keep individual numbers private, and review the bands at every funding round.

A clear compensation system is part of running an investor-ready company. First-time founders who want structure for that early stretch can look at Ignite, 1752vc's 12-week startup academy for founders in the early stages. Many investors read your first ten offers as evidence of whether you can run a company.

Common mistakes with startup compensation and equity

Quoting percentages without a denominator, which misleads the candidate or embarrasses you later.
Paying everyone the same cash regardless of role, then losing the person the market values most.
Forgetting that SAFEs and notes will convert and dilute the pool you are promising from.
Skipping the 409A and setting strike prices by guesswork, which creates tax exposure for employees.
Using equity to dodge a performance conversation. A grant won't fix a hire who isn't working out.
Letting the pool run dry before the Series A, then negotiating a top-up from a weak position.

Before each offer, run a quick check: role and market reference, stage discount and cash band, equity band in shares and fully diluted percent, how the candidate can trade cash for equity under your written rule, vesting and exercise terms, and pool remaining after the grant. If that takes ten minutes, your system is probably working.

The bottom line

Early offers set precedents you'll live with for years. Write the bands down, quote shares with a denominator, and show the math, including the scenario where the equity is worth nothing.

Cash pays this month's rent.

A well-explained grant is what keeps people through year three.

Key takeaways

Early-stage compensation is a trade between certain cash and uncertain equity, and in our view it is best presented that way.
Writing cash and equity bands before your second hire helps offers stay consistent and the pool lasts until the Series A.
Carta data shows a median first-hire grant of about 1.5% of fully diluted shares, falling to about 0.33% by the fifth hire.
Carta, citing HSBC's UK-focused Term Sheet Guide 2026, says most option pools there are 10% to 15% of the company; Carta suggests matching yours to a 12 to 18 month hiring plan.
Four-year vesting with a one-year cliff is the common pattern, and the tax code makes 83(b) elections due within 30 days of the transfer.
A worked example with shares, strike price, dilution, and two or three exit values tends to close more offers than a single headline number.

Frequently asked questions

How much equity should early startup employees get?

Carta's data on grants made between June 2023 and June 2024 shows a median of 1.49% of fully diluted shares for a first hire, and a summary of Carta's Winter 2025 State of Seed data shows medians falling to about 0.33% by hire five. Engineering roles tend toward the higher end. We would size each grant by risk, cash forgone, and role.

What is a typical startup salary compared to market rate?

Early startups usually pay below big-company cash, with the gap largest at pre-seed and narrowing after a Series A. For reference, Carta reported an average new-hire salary of $189,000 for engineering and product roles at startups as of June 2025. The smallest companies typically pay less in cash and offer larger option grants to make up the difference.

How do startups let candidates trade salary for equity?

It helps to write the rule down before you need it. One approach is to offer two or three packages for the same role, such as a market-leaning salary with a standard grant, and a lower salary with a larger grant, priced at a fixed exchange rate. Applying the same rate to every candidate means the offers stay consistent and explainable.

Should startup equity be given as a percentage or as shares?

A common practice is to grant a specific number of shares and provide the fully diluted share count so the candidate can calculate the percentage. Percentages change with every financing, and quoting one without the denominator creates confusion and mistrust. Sharing the strike price and the latest preferred price, clearly labeled, also lets the candidate model outcomes accurately.

How does vesting work for startup employees?

The most common schedule is four years with a one-year cliff. Nothing vests in the first year, 25% vests on the first anniversary, and the rest vests monthly over the next three years. If the employee leaves before the cliff, they keep nothing; after it, they keep what has vested and lose the unvested remainder.

Sources

Disclaimer: This guide is for general education only and is not legal, tax or investment advice. Laws, market data and program terms change, so it may not reflect the latest developments or fit your situation. Treat it as a starting point, not a source of truth, and talk to a qualified lawyer, accountant or financial adviser before you make decisions.