Startup Equity Compensation: Lead Engineers

In the dynamic world of startups, attracting top technical talent is often the key to success. One of the most important decisions for a startup founder is choosing a lead engineer. Additionally, one of the most important lessons for a startup founder is understanding startup equity compensation

What is a fair offer for my lead engineer? How do I negotiate equity packages, number of shares, or the vesting schedule with a potential candidate? Peacock Consulting frequently receive these common questions.

This blog post explores startup equity compensation for lead engineers, explaining the importance of equity in creating an attractive offer. We will provide stories, insights, and advice to help you navigate this important part of growing your startup.

Offering Equity to Lead Engineer ‌‌

Cash Compensation for Software Developers

Understanding the average base salary of a lead software engineer in your city is the initial step. Software engineers are in high demand for a reason - they perform complex work that deserves fair compensation. However, early-stage startups may not always have the capital to match the market rate for their first technical hire. Thus providing a well-balanced compensation package of both base salary and equity are critical to attract that lead engineer.

The current national average salary for Lead Software Engineers is just above $150,000. While each scenario is distinct, Peacock Consulting generally believes that your cash offer should be at least half of what engineers in your city typically earn. Any less and you are increasing the risk that the lead engineer will view your offer as not competitive enough.

Additionally, providing substantial equity to offset a low salary is possible, but be mindful of how that would impact current employees, current investors, future employees, and future investors. To gain a better understanding of how your city compares to the national average, explore the data available.

Equity for Software Developers

While company stock can't be the sole component of your compensation package, it may be one of the most vital. According to Carta’s 2022 data, the majority of startups were offering their first hire between 1-2.5%. It's worth noting that technical hires often expect a larger share of employee equity compared to a business development employee. The reason is simple: they drive more value for the company.

In the end, the honest truth lies in the marketplace. Technical team members possess valuable and in-demand skills, and there are plenty of enticing options available to them. As an early stage startup without a lead engineer, you are probably still finding product market fit.

When a talented software engineer contemplates a reduction in their base salary and a potentially less stable work environment, a founder's role in the hiring process is to sell the engineer on the company's mission and direction. If your mission resonates with an engineer and ignites their passion, it's often the equity you offer that seals the deal. It's the promise of shared success and a journey worth embarking upon.

Negotiating Startup Equity Compensation

Positives During Negotiations

As you attract top lead engineers, be prepared for in-depth negotiations covering both cash and equity. It's not uncommon for founders to initially feel hesitant about sharing intricate details about their company. However, it is crucial to understand that offering equity in a startup's early stages is a significant financial obligation for you. Additionally, it is a risky decision for the lead engineer you are contemplating.

Drawing from our own experiences, we've found that some of our most exceptional hires were the ones who asked insightful questions and sought a comprehensive understanding during the negotiation process.

They wanted to learn more about the company. They were interested in its value and who invested in it, whether it was angels or venture capitalists. They also wanted to know how much money the company has received and how long it can keep operating. Additionally, they were curious about the company's plans for future funding.

Sharing this level of information is not just about transparency; it's about building a foundation of trust and mutual understanding. It sends a strong signal that you are committed to forging a partnership that benefits both parties.

When prospective lead engineers have access to clear, meaningful insights about your company's financial health and growth trajectory, they become more enthusiastic about embracing equity in your startup. This open and honest approach sets the stage for a collaborative journey with your lead engineer, where shared success is the ultimate goal. Remember, while you are uncovering the value that they can provide you they are also discovering if your company is the right fit for them.

Leveraging Market Benchmarks

We have other articles that dive deeper into market benchmarks, but as a startup founder it is critical to understand what the market is offering. Many startups can compete on location, remote work, office perks, work culture, unlimited PTO, etc. However, in a recent blog post by Nicolas Behbahani, he highlighted an intriguing chart by Morgan Stanley. In which he states, "Researchers found for the first time that equity compensation is now considered the best way to engage employees and has become the most important financial benefit to meet long term financial goals." Through hundreds of interviews and conversations with lead engineers, we have found this research to be true. The majority of lead engineers place more value on the equity part of their offers compared to the other competitive incentives that startups can offer.

Legal and Financial Considerations

As an early-stage founder, you might not have extensive experience with startup equity compensation. Questions around restricted stock units, one year cliff, and strike prices are all usually new concepts for first time founders. Equity negotiations involve various legal and financial aspects, including tax implications and regulatory requirements. To navigate these complexities, it's essential for founders like you, who are scaling their companies, to educate themselves on these critical topics. However, we also recommend surrounding yourself with experts who can provide valuable guidance.

Consider hiring or contracting legal, tax, and HR experts who specialize in startup matters. These professionals can offer insights, ensure compliance, and protect both you and your company as you navigate equity negotiations. Having experts on your side can prevent legal and financial pitfalls and help you structure equity agreements effectively. One valuable resource that many of the startup founders that we've mentored have found helpful is Clerky.

The Dual Perspective

Our understanding of startup equity compensation for lead engineers has been shaped by supporting many founders. Additionally, we've supported many lead engineers throughout this process as well. We have developed an expertise in navigating startup equity compensation. In aggregate, we have helped founders hire over 400 employees within the engineering departments of their companies.

Our journey has been far from flawless, marked by numerous hiring missteps that have provided invaluable lessons. Peacock Consulting mentors founders and CEOs in navigating their technology strategy. A pivotal component of any startup's technology strategy is the process of hiring the right people. Understanding the nuances of cash compensation, equity compensation, and the negotiation process are essential. Having expert support will help you attract your first technical hire, and, more importantly, foster growth of your business.

If you are working to solve any of these problems then please consider working with us getstarted@peacockconsulting.com. We have had continued success accelerating software delivery and implementing all of these topics at scale.

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