Compensation at Startups

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Negotiation & Offer
Negotiation & Offer

Companies need to be deliberate when coming up with a philosophy around negotiation.

Companies need to be deliberate when coming up with a philosophy around negotiation.

Negotiation

This is easier to manage when you are two co-founders handling all offers but more difficult when you grow and have more people touching the offer process. Continually communicate and reinforce your policy on negotiation. If someone is a great negotiator, does that mean he or she should make more than a peer doing the same job? Probably not. Some candidates have help along the way (a mentor coaching them, inside information from current employees, etc.) that allows them to negotiate more effectively. If you want to have a level playing field, have a clear policy on negotiation where recruiters/hiring managers understand salary bands and an exception process for going outside of the guidelines. You should make it clear at offer stage that certain parts of the offer (base, bonus) are not negotiable, if that is your policy. Problems arise when there’s no clear policy.

Because it can be difficult to value equity in an early stage company, Homebrew recommends presenting two different offers to a candidate (regardless of level). This asks the person to make a clear choice about his or her compensation preference.

For example:

Offer A) Base Salary: 125K Equity: 1.25%

Offer B) Base Salary: 200K Equity: .75%

Offer A will be more appealing to someone for whom equity is the primary motivator and who may be willing to take a cut in cash. Offer B will be for the more conservative candidate who can not take a cash cut in the near term. Assuming you are managing the candidate’s expectations and having conversations about what is most important to the candidate (cash or equity), you should be able to put together a solution where both parties feel positive about the negotiation and understand the value of the offer.

Compensation Resources:

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Pave⁠

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First Round: The Right Way to Grant Equity to Your Employees⁠

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Index Ventures⁠

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The Offer Process - Timing

There are different schools of thought around what works best. Verbal offer, written offer, when and who should make the offer? Let’s make it simple.

Founder makes verbal offer to candidate and discusses potential start date.

Give candidate time (2-3 days for IC role and longer (~1 week) for executive level candidate) to process and ask questions about offer.

Negotiation period of 3-5 days. More for candidates where relocation is involved and for executive level candidates.

Both parties come to agreement on numbers. Candidate accepts verbally and commits to a start date.

Company generates written offer letter/employment letter.

Candidate gives notice at current company..

Homebrew recommends coming to a verbal agreement prior to putting together a written offer letter. You’ll save time and energy going back and forth revising written documents. The terms of the offer will be agreed on verbally and the candidate will want something in writing prior to giving notice if he or she is currently employed. Agreeing on a start date will help with a smooth transition for both parties. The candidate can be clear with his or her employer and will have built in the appropriate transition time. Leaving a start date “tbd” leaves room for overthinking an offer and potentially changing one’s mind (worst case scenario). It also leaves room and time for getting poached by another employer.

What if there is a significant amount of time between the time a candidate leaves the old job and starts the new one? This happens when a candidate has a previously planned trip or just needs down time. We don’t recommend you try to talk them out of this time. We believe people need time off to recharge between jobs. What we do recommend is communication during that time. Reiterate how excited you are that they are joining by sending an email, a postcard or a text message. Share any recent news about the company, product or team. These small gestures have high impact. Several days before the start date, it’s nice to have the hiring manager reach out to see if the new employee has any last minute questions about the start date. Use this as an excuse to reconfirm start time and share a high level overview of what the first day/week will look like.

Who should give the offer? In seed stage companies, this will be one of the founders. As your company grows, the founder or hiring manager may not be the one negotiating and giving the offer. This typically becomes the role of the internal recruiter or HR manager. Although it may be difficult in some cases for the founder or hiring manager to relinquish this responsibility, this needs to be the role of the recruiter consistently. Candidates should not be put in a position of negotiating with the person they are working with/for on a daily basis. Leave this to the folks in HR or Recruiting.

Best Practices for Closing

You’ve made a great offer. Now what? There are many things you can do (and not do) between the time you make a formal offer and the time a candidate has to accept.

DOs

Reference Checks. The most telling reference checks are what we refer to as “back channel/backdoor” references. These are not the references that the candidate gives you when you ask for formal references. The list of people that a candidate gives you is a list of people that have been coached. They are conditioned to say positive things which is why the candidate asked them to be on the reference list. Enough said. Reference checking should be used to address any concerns or dig deeper into any areas that a hiring manager/founder feels necessary. You will get the most candid responses from people who are not on a list the candidate has given you.

How do I go about doing this without breaching the candidate’s confidentiality if he or she is employed? First and foremost, do not call any contacts who currently work with the candidate. You only want to call your most trusted contacts who will not compromise the candidate’s confidentiality. Look at your own network and leverage your investor’s network. Homebrew is constantly helping with back channel references and this is a very important part of helping our companies grow. Have a clear understanding of what information you are trying to get. You may only have 10 minutes with someone and know exactly what you are going to ask. If you have 3 people to leverage for references, figure out what the biggest concerns are and divide accordingly. Go deep with each reference rather than trying to cover too many areas.

Put an expiration date on the offer letter and a start date. A candidate should have a finite amount of time to review the offer and have any questions answered. 3-5 days is fairly standard for most candidates. About a week is typical for candidates where relocation is involved or for executive level candidates. They need to figure out potentially when they will give notice and build in time to honor any commitments. The start date can always be changed but it makes things more tangible to have a real date.

Arrange a “sell” call with someone at the VC firm or board member who is a strong ambassador for the company. This is where Homebrew or someone on the board can help. Between Homebrew and our advisors we are happy to jump on the phone with a candidate when it’s decision time. We help with questions about company vision, equity value, culture and why Homebrew invested in your company. Sometimes we believe in a candidate more than the candidate believes in him or herself and we need to give the candidate confidence to make a leap of faith.

Send a personalized gift to the candidate and or family. Once you’ve made an offer, we recommend sending a gift to the candidate and/or his or her significant other. A nice bottle of wine, champagne or a gift certificate to a neighborhood restaurant. If there are children involved, you can incorporate something kid friendly (food gifts are a good standby).

Offer additional networking resources… the secret sauce. Relocation requires a lot of special handling. Taking a new job in a new city can be a very stressful decision. When there is a partner or children involved, there are many things your company can do to help make the decision and hopefully make the transition smooth. It doesn’t hurt to offer job search help to the partner as well. Helping with introductions to the internal recruiter, people in the company with similar backgrounds or recruiters outside your organization can be very helpful. Keep in mind that the offer decision may be in the hands of two people so anything you can do to help with a potential transition is time well spent. Additionally, if the candidate has school aged children, it is very helpful to introduce the candidate to other people in the company with children to talk about schools, neighborhoods, etc. The school application process can be a very stressful for families and the more resources and support they have early on, the better for them and you.

Trust your gut. If money is a huge stressor for a candidate and your offer is significantly lower than a competitive offer, this may not be the right fit for the candidate. You don’t want someone coming in and being stressed out about a financial situation that will not change in the near future. Additionally, no matter how badly you want to hire a candidate for his/her skillset, pedigree, or smarts, if your gut tells you they are not a fit, do not hire. You learn a lot about a candidate in the final negotiation phase and if it is starting to not feel right, most likely, it’s not.

DON’Ts

Badger the candidate. Too many calls or emails can be annoying for a candidate who is in a decision making process. Make it clear to the candidate that you are available to answer any questions but do not be a pest.

Discuss the candidate openly. Maintaining the candidate’s privacy is very important during this time, especially if he or she is employed. Other than internal employees and references, you should not be discussing this person’s candidacy with others. Even if the candidate is not in a job, you don’t want to bring attention to this candidate because this could jeopardize you closing him or her. Don’t make an assumption you have closed the candidate until he or she has signed the offer letter and given you permission to communicate the news to a broader audience. Assume he or she needs to work on a communications plan with the current employer before communicating the new position.

Negotiate Against Yourself. If you've put your best offer forward do not let the candidate continue to come back with requests for just a little more salary or a little more equity to close the deal. You will often be negotiating against yourself. There may be situations where the candidate get a counter-offer from their current employer (especially if they're a valued employee at a company like Google). There are two ways to handle this. First, prepare the candidate in advance that they're going to likely receive a counter-offer. Second, decide in advance if there's any higher you'd go in your offer to confirm the candidate. That way once the candidate comes back to you with a firm counter, you won't make an emotional decision but rather know your compensation boundaries in advance.

The Offer Letter

Your company should have a simple template for an employment offer letter. If you don’t, here is an

offer template⁠

. Make sure to have outside counsel review your template prior to sending to any candidates. eShares has a

model⁠

for explaining equity, benefits, and reporting structure in a very detailed offer. They make it very easy for the candidate to understand all the components of the offer in a straightforward, organized way.

What is the long term plan?

Managing compensation is an ongoing process. This is not something you can pay attention to once per quarter and expect everything to fall into place. Comp needs ongoing evaluation, review, and best practice reviews with peers, advisors and investors. Until you have someone in your company focused on compensation/rewards, it is the job of the founder to set the tone and reinforce a consistent policy for how you want to compensate your employees.

Leverage the help of your investors and advisory board, if possible. Some of these folks may have served on compensation committees of large companies and bring significant experience to the table. When you are ready to hire an internal recruiter or HR partner, look for someone who either has prior experience setting comp guidelines or a genuine interest in learning.

There are great resources (some free) in the market that you can use until you have someone fully dedicated to compensation and rewards. Here are a few we recommend:

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Glassdoor⁠

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Salary.com⁠

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Paysa⁠

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Pave⁠

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Assemble⁠

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WorldatWork⁠