Compensation is one of the most financially consequential decisions in a startup, and one where founders frequently make avoidable mistakes — paying above market in roles that don't require it, paying below market in roles where it leads to attrition, or building equity structures that create problems at the next funding round. Getting compensation planning right requires both financial analysis and strategic thinking about how you want to build the team over time.

The financial context for compensation decisions

Every compensation decision should be made in the context of your financial model and your runway. The question is not just 'what is market rate for this role' but 'what is market rate, and what is the impact of this hire on our runway, our burn multiple, and our ability to reach the next milestone?' A hire that's correctly priced at market rate but that pushes your runway below the threshold you need for your next raise is still the wrong hire at the wrong time.

Building a headcount model that shows the runway impact of each planned hire — at different salary levels — is the financial infrastructure that makes compensation decisions deliberate rather than reactive. It's a model most seed-stage companies don't have but should.

Benchmarking compensation

Compensation benchmarking should be specific: the right benchmark for a senior engineer in Nairobi is different from a senior engineer in Amsterdam, which is different from a senior engineer in San Francisco. Using global averages or US-centric benchmarks for roles based in different markets is a common source of both overpaying and underpaying — with predictable consequences in each direction.

For international teams, the right benchmarking sources are local: salary surveys from local recruitment firms, data from comparable companies in the same market, and — increasingly — data from the finance teams of portfolio companies at the same VC, who often share compensation data to help portfolio companies benchmark accurately. This data is worth gathering before making senior hires, not after.

Equity as part of compensation

Equity compensation is particularly important for senior hires at seed stage, where cash compensation is constrained by runway and where the ability to offer meaningful equity is one of the most powerful tools available to attract high-quality candidates. The equity component of a compensation package needs to be designed carefully: it should be meaningful enough to motivate and retain, vested over a structure (typically 4 years with a 1-year cliff) that aligns with the company's growth timeline, and structured in a way that doesn't create cap table problems at the next fundraise.

The option pool size — how much equity is reserved for employee grants — needs to be planned before the raise, not after, because investors will typically require a refresh of the option pool as part of the funding agreement, and the size of that refresh affects dilution. Working with a CFO or legal advisor to plan the option pool structure before your raise, rather than negotiating it under pressure during term sheet discussions, is the more founder-friendly approach.

Building a compensation philosophy

The most effective compensation frameworks are built on an explicit philosophy: whether you target median, 75th percentile, or a specific cash-equity mix relative to market, and how that philosophy applies consistently across the organisation. A compensation philosophy that's documented and applied consistently is fairer to employees — everyone understands the framework — and easier to manage financially, because it makes future compensation decisions predictable rather than case-by-case. It also makes conversations about compensation with existing employees easier: the answer to 'why am I paid this' is 'here is our philosophy, and here is where your role fits in it', rather than a negotiation based on whoever asked most assertively.