Meaning
Remuneration packages offered to the first employees of a venture usually consist of a combination of liquid salary and illiquid equity. This early team compensation is structured to attract talent when the firm has limited cash reserves but high potential for growth. Because the risk of failure is high, the ownership percentage granted is typically much larger than what later hires receive.
It establishes the baseline for the future hiring budget and dictates the initial dilution of the founding stake.
Allocation Ratio
Decision makers must weigh the amount of stock given against the cash salary saved. High levels of early team compensation in the form of equity can lead to significant dilution for the founders as the company scales. Balancing these two components requires a clear understanding of the current market value of the roles being filled.
Vesting Schedule
Retention of talent is managed through time-based or milestone-based restrictions on the ownership stakes. Under most plans for early team compensation, the equity is earned over a period of four years with a one-year cliff. This mechanism prevents individuals from leaving shortly after joining while retaining a large portion of the company.
If a person leaves before the cliff, they receive no shares at all. This protects the cap table from inactive participants.
Market Variance
Salaries for initial hires often fall below the standards of established technology firms. This deficit is balanced by future equity potential.
