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# Hiring & Compensation

## Table of Contents
[TOC]

## Preparing to Hire
Early hires are foundational to establishing company culture, and it’s important that founders spend a significant amount of time recruiting these team members. The temptation to outsource hiring may be strong, but we believe that recruiting world class talent is the highest-leverage action a founder can take. Hiring high quality employees early-on will also create network effects, making it easier to source high quality candidates later on as well.

The talent market has shifted dramatically over the last few years and the competition for top has never been more fierce. Creating a talent strategy has never been more important than now.
Employee Lifecycle

Early stage company (up to ~50 employees) are focused on the early portion of the employee lifecycle

- Attraction
- Recruitment
- Onboarding

As your team grows, the remaining pieces of the lifecycle come into view: retention, talent development and separation.

**Attraction**

It’s essential to lay cultural foundations early on and build with intention. Set out to establish your mission, vision and values as it’ll help you find the right people to join the team and contribute to the company’s growth. Culture exists whether or not you nurture it and the ability to articulate the company’s values and beliefs will enable you to attract and retain top talent.

- Mission: Stating your purpose. What do you do today? Who do you serve? What are you trying to accomplish? What impact do you want to achieve?
- Vision: Insight to the future. Where are we going? What do we want to achieve in the future?
- Values: Highlights your core principles and philosophical ideals. What do we stand for? What behaviors do we value over all else? How will we conduct activities to achieve our mission and vision?

This is your moment for your company pitch and elevate your employer brand.

**Recruitment**

There are a few common US employment types to consider:

- Full-time
- Part-time
- Contractor
- Temporary/Season
- Intern

Employment classifications:
- Exempt
- Non-exempt

Compensation Structure:

Target total cash:

- Base [calculated as a salary or hourly]
Annual bonus (short-term incentive plan) - % of base salary

On-target earnings (OTE):
- Base
- Commission - % of OTE

**Preparation**

Developing a structured hiring process will take time and experimentation, but will help an early stage company save time and avoid major hiring mistakes.

Once a business need to hire for a new position has been established, it's important to hold a kick-off meeting with the key stakeholders. This meeting is critical to ensure alignment before holding interviews and ultimately saving time for all parties involved and increasing success of filling the role. The following items should be discussed at a kick-off meeting:

- Define the job’s business objective
- Identify skills, traits and qualifications with understanding of job level
- Decide what the interview process will look like
- Divide tasks and responsibilities between interview team members
- Align on compensation target

## Sourcing
The goal is to find qualified candidates for your open role. You should be armed with a written job description when you are ready to begin sourcing. Anatomy of a job description:
- Position title (make it SEO-friendly)
- Compelling intro to the company (sell the vision)
- Responsibilities and skill requirements/”must-haves” (stick to ~3)
- Nice-to-have section
- Process details
- Compensation details
- Perks, benefits and role logistics
- How to get in touch

Tips for sourcing great candidates:
- **Communicate your values:** Cultural alignment is crucial in the early days of a company. Make the company’s values clear both internally and externally. This will make recruiting more efficient, as it will be easier to assess fit both from the recruiter’s and candidate’s standpoint. If you hire a candidate and find that they are not a cultural fit, do not be afraid to fire quickly. Not all hires work out.
- **Look for candidates with a track record of execution:** Candidates often have easily accessible portfolios (personal websites), side projects (Github profiles), or you can reference check projects they completed in previous roles.
- **Hiring sprints:** Similar to an internal hackathon, rally the current team for an internal hiring sprint where you all collectively spend 1-2 hours sourcing candidates from your network online. Internal hire sprints give your team members agency and allow you to tap into the super connectors in your network. Offering referral bonuses may also be an effective strategy for improving the candidate pipeline.
- **Follow for follow:** Check the following lists of operators that you already know are high quality; high quality operators often have a network of equally high quality operators.
- **Work trials/case studies:** Work trials can be an effective way to gauge a candidate’s work product and ability to work with your team. The key to executing successful trial projects is to keep projects time-boxed and limited scope with clear deliverables.
- **Talent is always on the market:** Don’t restrict your search to just those actively looking–be open to chatting with potential candidates currently working at larger, high quality companies: Coinbase, OpenSea, Uniswap, Foundation, etc. Even if these people aren’t actively looking, they may be open in the near future/know people in their own networks who are open to new roles.

## Interviewing
Screening involves asking the right questions. Questions should be prepped by the interview team prior to starting the interview process and candidates should be asked the same questions. The best questions are competency based. It is illegal to ask a candidate questions about their:

- Age or genetic information (Can ask if someone is of a certain age if required for job e.g. you need to be at least 18 to work in a bar)
- Birthplace, country of origin or citizenship (Can ask “Are you legally allowed to work in the US?”)
- Disability
- Gender, sex or sexual orientation
- Marital status, family, or pregnancy
- Race, color, or ethnicity
- Religion

A scorecard with the questions for each round can be created to help the interviewer stay focused. This is also a place where you can take notes during an interview. It’s important to be able to refer back to important facts, rather than relying on memory. This is especially crucial as multiple people may be moving through the round.

**Types of interviews:**
- Phone screen
- Technical interview
- In-person presentation
- Take-home assessment
- Contract/trial
- Questions candidates are likely to ask:
- What are your core business metrics/how is product-market fit?
- How much do you expect to grow headcount-wise over the next 6-12 months?
- What’s the culture like/what are the company’s values?
- How much runway does the company have/what are your plans for fundraising?
- Who will I work most with in this role/who will I report to?

**Example of a standard interview process:**
1. Phone Screen
2. Culture Screen
3. Technical Screen
4. Small Team Culture Screen
5. SuperDay Assessment (several back-to-back interviews including both culture and technical screens)

**Selecting**
As talent moves through the pipeline, you need to evaluate at each stage to determine if they continue to advance. Hold a debrief meeting after a group of people have moved through a round and get back to those not advancing as quickly as possible to improve candidate experience.

**Hiring**
Once you’ve narrowed down your talent pool to a candidate that you’d like to make an offer, it’s time to close the deal.

- Begin with a verbal confirmation. Call the candidate and extend your offer. Address any final questions they may have.
- Send a written confirmation. Reiterate what you discussed on the phone.
- Once you’ve agreed on the details, send the Offer Letter / Employment Contract
- Complete offer by all parties.
- Get ready for your new hire’s first day!

:::success
Note: It's important to ask candidates about their "salary expectations" early in the interview process both to determine potential alignment and for benchmarking purposes. You *cannot* ask a candidate about their current salary.
:::
## Salary and Compensation
Total compensation is made up of several factors: salary, benefits (paid by employer), bonuses, and equity.

Developing a compensation philosophy/framework early-on will ensure smooth scaling as you add more team members. Mapping out the following will make it easier to be equitable and efficient when hiring and onboarding early employees. A compensation philosophy will accomplish the following:

- Make a statement outlining the company’s market position about employee compensation
- Explains the “Why” behind employee pay and creates a framework for consistency
- Attract, retain and motivate employees.

Developing your philosophy:

It’s easy to get lost in all of the data when it comes to developing your philosophy. Below are a few key elements to consider:

- Who are your peer talent competitors? Outline who you view as talent competitors:
- Usually they’re within the same industry (but doesn’t need to be)
- Generally will pay similarly or more competitively
- Talent peers should have a similar job family make-up

How competitive do you want to be in the market? Target how competitively you want to pay compared to the overall market.
- Your market can be further defined by industry and/or geographical location eg tech companies in the Bay Area
- Typically companies define their market competitiveness by a percentile of the market (ie: 50th, 75th)

### Cash Compensation
The cash element is often top of mind for candidates.

Founders should be paid reasonably minimal cash compensation. Equity upside is the primary value bucket.

**Cost of labor**
Assess the cost of labor in a local market; this is what you’ll have to pay to hire for a specific role. This is different than cost of living (COLA), though it may be correlated.
Geographic Pay Differentials
With the rise of remote and hybrid work, companies may adjust salaries for employees based on market rate in those respective cities to acknowledge the cost of labor.

- Tier 1 Cities: San Francisco, Palo Alto, San Jose, Seattle, and New York
- Tier 2 Cities: Boston, Washington DC, Los Angeles, Portland, Boulder, Chicago, Austin, Denver, San Diego, Miami
- Tier 3: remainder of the US

To simplify calculations, Tier 1 cities will typically be paid fully aligned with the compensation philosophy percentile, then Tier 2 and Tier 3 are a percentage of Tier 1.

- Tier 1 = benchmark
- Tier 2 = Tier 1 * 92%
- Tier 3 compensation = Tier 1 * 85%
Job Leveling:

While you may not have a robust job leveling framework, it’s important to fully scope a position and determine exactly what the new employee will do and how much experience they need to have to be successful. Each level should be defined by impact, seniority, knowledge, skills and job title which can then be associated with a specific pay band

**Job Level**
Individual Contributor:
IC1: Entry
IC2: Developing
IC3: Career
IC4: Advanced
IC5: Expert
IC6: Principal

People Manager:
M3: Manager
M4: Senior Manager
M5: Director
M6: Vice President

** IC & People Manager tracks do not directly map to each other (eg IC6 is not necessarily equivalent to M6)

Within each job level, you can develop pay bands. This will be a range that you reasonably anticipate to pay for the job. Companies should leverage different data sources to pull. A free data source for start-ups to begin gathering data is Pave. Organizations should seek to supplement their data with other sources such as Radford or Levels FYI.

Developing pay bands have become more critical the last few years with the rise of pay transparency laws. For example, in NYC all roles that could potentially be filled by someone in NYC (this means that US remote roles are also covered by this law), must include a compensation range on the job posting.

### Equity Compensation

Equity Compensation for employees is strongly influenced by when they join a company. The first few hires after a founder(s) are still taking on a large amount of risk, so their equity should reflect that. As your team grows (usually around when headcount hits 5-10 employees), it’s best to begin thinking about an equity framework that has developed in a similar manner to your compensation philosophy.

**Stock Options**

- **Stock Options:** Represent the right to purchase shares of your company at a fixed price, known as the Exercise Price. You earn the right to exercise your options over a determined time schedule (“vesting”). There are two types—ISOs and NSOs—and early-stage companies will typically issue a mix of both to their employees.
- **Terms:**
- **Exercise Price:** Fixed price per share at which stock can be purchased
- **409A Valuation:** “Fair market value” of company equity
- **There are two types of options with different tax implications: Incentive Stock Options (ISO)** and **Non-qualified Stock Options (NSO.)**
- Only employees can receive an ISO. Employees, directors, advisors, etc. can receive NSOs. The biggest distinction is tax treatment at the exercise date.
- **For NSOs:**
- Pay ordinary income tax on (409A value - exercise price) when you exercise your options. So, if you pay $2 to purchase each share and the 409A value is $10, then you’re taxed on the $8 spread.
- Pay capital gains tax on (sale price - 409A at the time of exercise) when you sell the shares. So, if you exercise the shares when the 409A value is $10, then sell those shares for $50, then you’ll be taxed on the $40 capital gain. (Depending whether you held the shares for over a year before selling them, you’ll either pay long-term capital gains or ordinary income tax rates on them.)
- **For ISOs:**
- Pay no tax when you exercise—unless you trigger the AMT.
- Pay long-term capital gains tax on (sale price - exercise price) when you sell—if the shares are sold at least one year after exercising, and at least two years after your options were granted. Otherwise, (sale price - exercise price) will be taxed as short-term capital gains (roughly ordinary income).

:::success
Note: Exercising your ISOs can trigger the **alternative minimum tax (AMT)** which is a tax taken on the spread between the strike price and 409A valuation of your options.
:::

:::success
Note: There's something called a **disqualifying disposition**, which refers to selling, transferring, or exchanging ISO shares before satisfying the ISO holding-period requirements (two years from date of grant and one year from date of exercise). If you sell, transfer, gift, or short the stock too soon, you lose the tax benefits of ISOs.
:::

:::success
Note: There’s something called a 90-day **PTE window**, which means when you leave a company you have 90 days to exercise your stock options. For an employee to have the flexibility to exercise their stock options beyond 90 days, the company needs to convert each departing employee’s ISO grant to an NSO grant, losing the tax benefits of an ISO.
:::

:::success
Note: Some companies allow their employees to exercise their stock options before they fully vest so employees can save on taxes. To early exercise, you must file an **83(b) election** in order to verify that you purchased the options and are including it as income within that tax year (instead of in the future when it vests). You must file the 83(b) election within 30 days of the grant or exercise.
:::

**RSUs**

- **Restricted Stock Units (RSUs):** grant the employee the rights to acquire certain number of shares of company stock. These shares are typically subject to a vesting schedule, based on time and occasionally performance.
- RSUs are usually issued by *later stage/public companies* because the service-based vesting schedule encourages retention, the company’s capitalization is not expanded until shares are actually transferred, the admin overhead is limited, the value of the award is simpler to communicate on the grant date to the grantee, and vesting dates can be aligned with open trading windows to allow for “sell-to-cover” broker arrangements that allow employees to use a stock market to pay taxes. For privately-held companies, this solely service-based vesting structure does not work as well due to the illiquid nature of private company common stock and the inability to use a stock market to fund the payment of taxes, as a participant would be taxed on the value of the shares received at settlement without any cash liquidity to satisfy the associated tax obligations.

**[Stock Options vs RSUs](https://www.goodwinlaw.com/en/insights/publications/2023/02/02_16-what-are-doublevest-rsus)**

- Important to ensure options use standard common stock

**1. Exercise Price**

- **Stock Options:** The employee is given the choice to either buy or sell the stock at a certain Exercise Price.
- **RSUs:** The employee only has to fulfill the terms of the vesting schedule or plan in order for their RSUs to become common stock.

**2. Value**

- **Stock Options:** Incentivize employees to grow the value of the company. If you’re granted stock options at a certain valuation, you’ll be incentivized to ensure that the company’s valuation increases because the value of stock options will also increase.
- **RSUs:** Retain some value regardless of how well the company performs. This value may not end up being all that much if the value of the company depreciates, but it’s still *some* value. Generally speaking, an employee would receive fewer RSUs than stock options in an equity package of roughly equal value.

**3. Taxes**

- **Stock Options:** Differs based on type of option. As a rule, options are only taxed after they’re exercised, but the specific taxes you’ll pay may differ based on the type of option. Gains or losses may be considered short- or long-term capital gains or losses, depending on whether the option is an ISO or an NSO and how long the stock is held after the option is exercised. One additional point to note is that ISOs may be subject to the AMT, which is designed to make sure that certain taxpayers, generally with high income, pay at least a minimum tax, limiting their possible tax deductions and exclusions.
- **RSUs:** Employees don’t have to pay any taxes at the time of the grant. They must, however, pay taxes when the RSU is fully vested and liquid. RSUs are taxed at ordinary income tax rates, which can vary by state.

**Option Pool:** An employee Option Pool—or Employee Stock Option Pool (ESOP)—is equity specifically allocated for employees, in the range of 15-20% of equity. Typical sizing ranges based on a number of factors, but the following provides a reasonable framework:

- CEO (non-founder): 5-8%
- CTO: 3-5%
- Early Senior Engineers: 2-3%
- Early Junior Engineers: 1-2%

Note: The issuance of securities (common stock) for compensation needs to be structured so that it is exempt from Registration. Rule 701 can be relied on in the context of compensation for this purpose.

- Consult counsel on key parameters to be mindful of, including permitted recipients, disclosures, and sizing.

If an early founder leaves, their shares can either be forfeited/burnt (reducing the overall capitalization of the company), or recycled back into the ESOP

- The latter approach can preempt additional dilution from a subsequent fundraising round in which investors might push for an option pool refresh back to a pre-specified level (often, 10% of the pre-money).

**Required Documents:**

- **Stock Option Plan:** Master overview of all intended options to be issued
- **Stock Option Agreement:** Agreements between individual recipients and the company with details on Options
- **Exercise Agreement:** Agreements between individuals and company detailing method of exercise

**Equity Vesting**

- **Standard Vesting Schedule:** 4 years with a 1 year cliff *(ie: after 1 year, 25% of shares get vested, with the remainder vesting on a monthly schedule across three years)*
- As discussed, vesting is both a protective measure and a way to ensure long-term alignment among key insiders.
- **Accelerations: Vesting can be accelerated based on a few situations**
- **Single Trigger Acceleration:** Shares automatically vest in the event of a merger or change of control
- **Double Trigger Acceleration:** Shares automatically vest in the event of two events (typically, M&A + firing)
- Accelerated Vesting is standard for founders’ shares and often used for senior executives, but is not typically granted to employees or advisors
- Single trigger acceleration is highly uncommon

## US Engineer Compensation Benchmarks

Source: [Pave](https://www.pave.com/), *data as of February 2023*

### Cash Compensation Benchmarks

**Companies that have raised $0-5M**
| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | $80,000 | $93,600 | $110,000 | $121,000 |
| Mid (2-5 Years) | $107,250 | $128,960 | $150,000 | $172,640 |
| Senior (5-7 Years) | $150,000 | $175,000 | $200,000 | $224,224 |
| Manager (8+ Years) | $150,000 | $182,371 | $215,000 | $235,825 |
| Director (10+ Years) | $157,500 | $187,000 | $221,400 | $280,800 |

**Companies that have raised $5-20M**
| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | $85,000 | $100,000 | $115,000 | $133,350 |
| Mid (2-5 Years) | $115,500 | $135,000 | $155,730 | $180,000 |
| Senior (5-7 Years) | $150,600 | $173,000 | $195,000 | $220,000 |
| Manager (8+ Years) | $160,000 | $182,200 | $200,000 | $230,000 |
| Director (10+ Years) | $175,000 | $200,000 | $220,000 | $250,000 |

### Equity Compensation Benchmarks

**Companies that have raised $0-5M**

Equity Compensation ($/year with 4 year vest)
| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | $7,816 | $12,000 | $24,391 | $53,779 |
| Mid (2-5 Years) | $10,149 | $28,050 | $56,350 | $99,756 |
| Senior (5-7 Years) | $31,226 | $73,584 | $148,088 | $216,193 |
| Manager (8+ Years) | $23,263 | $33,022 | $46,660 | $47,600 |
| Director (10+ Years) | $44,608 | $56,000 | $93,200 | $249,000 |

Equity Compensation (%)

| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | 0.064% | 0.099% | 0.160% | 0.297% |
| Mid (2-5 Years) | 0.081% | 0.224% | 0.401% | 0.750% |
| Senior (5-7 Years) | 0.200% | 0.440% | 0.750% | 1.097% |
| Manager (8+ Years) | 0.126% | 0.186% | 0.402% | 0.850% |
| Director (10+ Years) | 0.259% | 0.372% | 0.501% | 0.751% |

**Companies that have raised $5-20M**

Equity Compensation ($/year with 4 year vest)

| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | $3,424 | $8,190 | $35,250 | $150,278 |
| Mid (2-5 Years) | $14,400 | $27,927 | $67,560 | $144,800 |
| Senior (5-7 Years) | $31,959 | $63,600 | $120,528 | $254,478 |
| Manager (8+ Years) | $33,280 | $57,643 | $98,880 | $112,895 |
| Director (10+ Years) | $39,000 | $67,647 | $182,400 | $345,656 |

Equity Compensation (%)
| | 25th | 50th | 75th | 90th |
| --- | --- | --- | --- | --- |
| Entry (0-2 Years) | 0.012% | 0.030% | 0.200% | 0.500% |
| Mid (2-5 Years) | 0.033% | 0.070% | 0.150% | 0.272% |
| Senior (5-7 Years) | 0.067% | 0.121% | 0.250% | 0.501% |
| Manager (8+ Years) | 0.084% | 0.150% | 0.237% | 0.258% |
| Director (10+ Years) | 0.104% | 0.301% | 0.710% | 1.896% |

**Token Compensation**
::: success
Note: Before designing a token compensation package, we recommend consulting your own legal counsel and tax/compensation attorneys, as regulations around tokens are constantly evolving.
:::

**Tokens vs Equity**

Token-based compensation bears several similarities and unique differences to traditional equity compensation.

**Similarities**

- A **pre-launch token grant** can be thought of similarly to an *option*, which is to say that their value largely depends on a future launch event (Token Generation Event). Like stock options, there’s also no tax burden to you upon receipt of pre-launch token grants - but they will likely incur taxes upon exercise in the way that you’d be taxed on the exercise of an NSO.
- A ************************************************post-launch token grant************************************************ is reminiscent of an *RSU*. The tokens exist within a liquid market (although they may be subject to vesting and lock-ups), and the recipient is taxed immediately upon receipt.

**Differences**

- Tokens have instant liquidity and faster time-to-market
- Tokens don’t have exercise cost or windows, as options do
- Token value changes in real-time with the market
- Tokens can be structured more flexibly to compensate and retain global talent with different treatments for capital gains, salary taxation, and local regulation

**Structure**

Based on consensus research, you may want to reserve 15-20% of token supply for team members. This benchmark is based on the average team size at time of token generation which is usually 20-40 people. If you expect it will take fewer or more people to reach token launch, consider adjusting your allocation accordingly.

**Vesting/Lock-up**

A standard vesting schedule of 4 years with a 1 year cliff beginning on date of employment is the most common. Variations on token vesting schedules:

- **Linear**: Employees vest 25% per year over 4 years.
- **Back-weighted:** Employees vest a larger percentage each year. This is less competitive from a hiring perspective (because it gives employees less ownership upfront), but it also incentivizes longer-term retention.
- **Front-weighted**: Offering larger annual grants up front may compel candidates to join, but reduces the financial incentive for employees to stick with the company long-term.

Token grants will also typically have a separate **lock-up** that will prevent you from transferring any of your vested tokens for a period of time.

**Vesting** implies a risk of forfeiture, while a **lock-up** is only a transfer restriction focused on preventing selling pressure.

**Taxes**

::: success
Note: Before designing a token compensation package, we recommend consulting your own legal counsel and tax/compensation attorneys, as regulations around tokens are constantly evolving.
:::
## Benefits
Most startups in the US need to offer basic benefits–health, vision and dental–to be competitive in the market. Other potential benefits might include:

- Gym membership
- Mental health coverage
- Fertility benefits
- Co-working space credits
- Commuter stipend or Lyft/Uber credits
- Continuing education stipend
- Weekly or monthly “team days” or social outings
- Matching 401K

## Disclaimer
*This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment or legal matters. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Archetype. This post reflects the current opinions of the authors and is not made on behalf of Archetype or its affiliates and does not necessarily reflect the opinions of Archetype, its affiliates or individuals associated with Archetype. The opinions reflected herein are subject to change without being updated.*