Team composition & compensation in a startup

This article is part of a series about how to manage a small software start-up, the first article & overview is found here.

Photo by Pascal Swier on Unsplash

Team Composition

When you start a company, there will be no employee — every team member you recruit for your project should be willing to be a co-founder and have complementary skill-sets to the rest of the team. You won’t find the perfect mix from the start, so cherish diversity and focus on strengths rather than weaknesses when carving out responsibilities for each person. (See also this short Forbes’ article) What is good to align early on is the north star of the company (described in the previous article) and why you feel you want to take on the entrepreneurial journey.

Once you start working on your company (or maybe just project at this stage), you typically won’t have clear job descriptions carved out, and it is acceptable to allow for some “storming” phase. Still, it is crucial to have the goal to assign clear responsibilities to everybody. You will be surprised about the productivity improvements amongst you — it will also be important for investors, customers, and employees to have a clear contact person. In addition, it allows everybody to imagine if the defined roles are what they want to pursue in their career (think deeply about this, see Garry Tan’s video)

As you most likely will not be a “hyper-scale” startup initially, it is alright if people still have to learn some hard skills to get the job done and if they are not the right person to hold the same position in a 1000 people company (“do things that don’t scale”). I also see this as a significant advantage of working in a startup to have the possibility to grow into roles you couldn’t have imagined before. (I also like the idea of “de-label yourself” mentioned by Garry Tan)

To create these job descriptions, we first listed all necessary tasks, such as financial planning, fundraising, or product leadership. We then ordered and assigned them in a Responsibility assignment matrix (RAM/RACI) with each person having one of these fields assigned for every task:

• R: Responsible & accountable — The person (only one!) taking charge and being accountable for decisions taken
• C: Consulted — People who should be included in decision-making processes (and should ideally buy into a decision)
• I: Informed — People that should be made aware of all decisions
• N: No connection — People that have nothing to do with this task (e.g. salesperson not involved in detailed technical decisions)

This matrix should naturally be a living document that can be debated at any time and will change with people progressing in their careers and new hires being made. We found these assignments to be much more important and powerful than simple job titles such as “CEO” or “Software Engineer”; however, you will still need to assign “public job titles” for everyone for external communication reasons. Keep in mind that the assignment matrix should take precedent over public perception of the role described by the title.

To give you an idea about the roles and titles involved, this was our team set up in 2019:

• Chief Executive Officer (CEO): Responsible for defining the vision and story of the company, raising capital, and leading the board meetings. Also responsible for sales at the start.
• Chief Technical and Operating Officer (CTO & COO): This was my role, at least 70% on the technical side, hiring the software engineering team and leading the product implementation. On the operational side, I set up the company processes such as recruiting, recurring meetings, and guidelines. We wanted to hire for one of these roles but couldn’t find a fit during my time.
• Chief Financial Officer (CFO): This role should be a maximum of 10–20% initially. Responsible for the financial health of the company and forecasting future capital needs. In hindsight, we should have assigned this role to a founder instead.
• Business Developer (BD): The primary responsibility was actually to sell our products and services. I recommend not spending time on the BD vs. sales debate; in the beginning, all sales are also business development (see related coming article)
• 3 Senior and 2 Junior developers: The people actually developing the software product (led by the CTO). Many levels can be defined here; we opted solely for senior roles when there was more responsibility on a specific product aspect (infrastructure and design, for example) — in our case coinciding with more experience of the person.
• Accountant and Lawyer: Two people you will usually pay by the hour starting from the incorporation of the company.

Note that even though the C-titles simply come from the responsibilities, they also represent a hierarchy as these people are part of the company board and had the power to hire and fire people in the team. Even though you should aim for a flat hierarchy in terms of the work culture and communication channels, I recommend acknowledging the structural hierarchy that exists and dealing with its reality.

Regarding our team setup, a big learning was that one should not delegate the financial overview to someone who is not a fully integrated part of the team. Especially the CEO should understand the financial health at all times. We learned that by working with a great accountant (shout-out to Salman) and having the willingness to learn, you can get pretty far also without hiring an experienced CFO.

Photo by Dan Dennis on Unsplash

Compensation

I often made the experience that conversations about compensation are deferred and avoided as much as possible in the typical startup environment — I think this is a huge mistake. An example argument I heard was along the lines of “if you believe in the mission, the work should be fulfilling enough not to focus on the salary”; anyone who joins your startup will already do so because of the mission and team, as you most likely offer less pay than the market-average and can’t provide the job security a more established company can — so don’t use this as an argument.

Even if your new team members might seem like they don’t mind too much at the beginning with the prospect of a growing company and eventual pay-outs, the discussion will happen, and you will bite yourself if the expectations haven’t been made clear about both salary progression and equity distribution.

When we started the company, we did have a plan to discuss at least the equity compensation from the start; we based it on the Slicing Pie model, which in a nutshell is composed of:

• Summing up both cash injections and opportunity costs, defined as the difference between a market salary and the actual salary, results in the “total pie”. Different multipliers for cash vs. opportunity costs, as cash is “realized.”
• The percentage ownership in the company (or project) is distributed according to everyone’s input into the pie.
• Defining a time-point when the pie is frozen and converted to equivalent equity (for example hitting product-market fit and starting to fundraise)

In addition to the model, we had the following changes:

• As we used the model for over 4 years of work, we added risk multipliers for each year according to the chance of the company surviving at least 5 years (data gathered from this report from Switzerland)
• Distinction between “executives/founders” receiving voting shares and “employees” receiving non-voting shares (participation rights)
• At least once a year, the market salaries for each position are researched and re-defined (e.g. payscale or glassdoor)
• Standard terms such as a 12 months cliff, vesting, and bad leaver provisions (e.g. criminal activity)
• Instead of a paid tool, we had our own simple shared google sheet.

In retrospect, I still think it’s a good idea to use this model during the starting phase of a company to guide the discussions around compensation for the first team members, motivated by ownership. However, we realized that a fixed share package probably results in a better situation for later employees. Even if it won’t be as ideally fair as the slicing pie model aims to be, the upfront clarification of share numbers and conditions results in more explicit expectations and less perceived risks. Therefore, I suggest distinguishing clearly between a “founding team” (not everyone necessarily titled a “co-founder”) and employees.

Also for the founding team, there are several caveats to look out for:

• The pie needs to be frozen well before the first investor comes in. Otherwise, it might delay successful fundraising significantly
• If you do not pay market salaries to the founding team after the first funding round, people will ask how their future opportunity costs are compensated
• Even though it was wise not to spend money on the contracts for some time, I would suggest drafting a “semi-legal” document to have the expectations right for vesting, rights, and obligations of the shares — expectation management is everything here!
• You should make sure that all members regularly check the pie allocations as otherwise there will be a lot of discussions when trying to implement the plan.
• It is wise to define early on what kind of shares will actually be implemented, phantom stocks, voting/non-voting shares, options?
• There will still be discussions about the risk multipliers and market salaries.
• To found the company, some founders will receive shares initially — you might need to define a regular interval of “realizing” the pie.

As mentioned, I would aim to switch to a fixed equity package as early as possible. The easiest way to define the fixed packages is to simply look at the market standards; check this excellent report from Index Ventures about equity compensation in European startups.

Regarding the actual salaries and position titles with associated market salaries, there is no silver bullet. In my opinion, it is easiest, in the beginning, to have a few fixed salary classes (e.g. junior, senior, management) to avoid negotiations as much as possible. However, most people will want to progress, and it is essential to think about their career trajectories and not just the company’s progress.

Some people believe in goal-based bonuses; I think that this is a minefield and can create wrong incentives to be avoided at the start.

As mentioned in the previous article, we had transparency as one of our core values, so all salary and equity information was transparent — I think this helped avoid rumors and wrong projections of the team, so I would encourage everyone starting a company to consider this.

In general, compensation is a complicated topic for which further discussions in the startup community would be very valuable :-)

In the next article, I will share my viewpoints on recruiting the right people for your team.