Startup salaries: what pay to expect at a new business

To attract the right candidates, startups must have salary policies and understand how salary bands work. Employers must balance offering a competitive remuneration package that includes salary, benefits and, potentially, equity, against the budget constraints of the business.

Employees, whether just starting out or highly skilled, are likely to know what they should be paid and what benefits to expect when joining a startup.

This article will cover the current UK recruitment landscape and startup salary considerations for employers – including equity compensation and its benefits and drawbacks – followed by the factors employees need to consider, and how they should negotiate a startup salary.

Startup employers: what should you pay?

Startups must research the market to find the appropriate salary range for each position they hire for. There are no set criteria for startup salaries – it depends on the role, and the startup’s financial resources.

UK salaries vary by industry and the skills and experience candidates offer, but there are also regional variations based on where businesses are based, with London attracting higher salaries for similar roles.

Startup jobsite Wellfound.com’s research indicates that in the year to April 2023, in London, the median salary for a startup employee with three years’ experience was approximately £59,000.

Based on seniority and skill level, startup salary ranges were:

• Entry-level positions: £20,000 – £60,000
• Mid-range positions: £40,000 – £90,000
• Highly skilled employees: £100,000 – £145,000

Salaries are higher for private sector roles where skills shortages are evident, such as technology jobs. Entry-level employees seeking these roles expect a higher salary than for similar roles that aren’t impacted by skills shortages.

Even within each sector, there are variations. Finance graduates joining a private investment bank may expect to receive £50,000 in their first role, compared to a startup accounts clerk who could earn £18,000 initially, outside of London.

Logically, jobs in sectors with high vacancy levels should pay more, but many of these positions are in nursing, education, and social work.

These are often low-paid public sector roles with defined pay scales, so candidates and employers have less scope for negotiation. Similar roles within the private sector can pay more, but not always. All roles must adhere to national minimum and living wage rates.

Startup equity compensation

Startups have options for paying employees that distinguish them from more established businesses. Some startups reserve a proportion of equity – usually around 10% – for c-suite executives and key employees. Early-stage startups usually allocate more stock for equity than later stage startups.

Startup founders must decide how much equity to allocate, though investors can influence this. Choosing how much of the company to relinquish is a vital but emotive decision for owners.

Equity compensation can sweeten the (pay) pot for key recruits. It reduces fixed salary overheads, can motivate candidates, and attract people who buy into the startup’s aims and want a stake in its success, which can reduce employee turnover. It also helps startups avoid overstretching their budget.

Some candidates may be willing to sacrifice part of a guaranteed salary for a stake in what may become a successful business.

The key considerations regarding equity compensation are:

• How much of the company to allocate
• Who to offer equity compensation to
• What type of equity option to offer
• Equity vesting timeframes

The most common type of equity compensation is stock options, which gives employees an option to buy stock at an agreed price. If the business is acquired or goes public via an Initial Public Offering (IPO), they can cash out their equity.

Other options include performance shares, which are usually for executives and linked to targets. Unlike stock options, restricted stock awards are automatically owned by the employee, but they have conditions that must be met before the stock is issued.

Owners must also consider equity vesting options. This is a schedule of when employees actually receive shares or other ownership assets, usually linked to how long they have been employed. Typically, an equity vesting schedule allocates over four years, so an employee is due 25% each year, so they receive 100% after four years.

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The pros and cons of equity compensation for employers

Employees: what to expect from a startup salary

If you’re looking to apply for a job at a startup, we recommend that you research the salary ranges for the roles you apply for based on your skills and experience, the industry, and the startup’s size.

Check whether the startup has received any funding, has published accounts, and if it appears close to an IPO or being acquired. The more established the startup, the higher total salary an employee can expect. If it’s very new and small, there may be more scope to negotiate equity compensation, particularly for first hires, but the salary is likely to be lower.

Employees must balance the potential opportunities of working for a startup and being a key part of a growing venture, with the need to earn and develop their career appropriately.

Considering equity compensation as an employee

If a candidate believes in the long-term vision and growth potential of the startup, equity compensation could be attractive. It could lead to higher total income than a market-level salary. A stake in the company can give employees a sense of purpose and a vested interest in its success.

On the flip side, the startup could fail or grow slowly, and the employee may only receive a lower than market-value salary in the meantime.

If the opportunity, potential earnings, and career development opportunities look promising, then considering a startup position with a low base salary is viable.

The disadvantages of equity compensation for employees

A salary is certain, equity compensation is not. Employees should understand that if the company is not successful, they could lose payroll wages and may not receive any equity.

Equity compensation has tax liabilities, although rates can be less than income tax or National Insurance rates. Normally, either short-term capital gains tax based on income applies, or if employees sell shares, long-term capital gains tax is applied to investment profits. If employees sell at a loss, they have to report a capital loss.

Either way, there are restrictions on when employees can cash out equity compensation, linked to the vesting period and whether a startup is acquired, merges, or has an IPO.

Employees must also plan and schedule equity compensation arrangements with their career plans, or risk not receiving some or all of their benefits if they leave before the end of the vesting period.

Other benefits of working at a startup

Aside from equity and salary, candidates can negotiate other benefits from a startup job.

Startup businesses may be limited in what they can offer, but all will offer a workplace pension via auto enrolment for employees who are aged over 21 and earning over £10,000. Some may offer healthcare benefits, training, and other employee wellbeing perks.

Early-stage employees can influence how the startup develops additional benefits, and help define the company’s values.

Negotiating a startup salary

Tailor startup job applications to accentuate your skills and the benefits you offer. Present your qualifications, capabilities, and experience to support your salary negotiations.

Consider balancing a fixed salary with equity compensation and other options, particularly if you believe the startup will be successful.

The scope you have for this depends on the fixed income you need, but some startups may be flexible on equity and benefits, even if they don’t concern the base salary.

If that’s the case, negotiate regular pay reviews for opportunities to increase your salary. The startup may agree to regular reviews linked to performance or other factors.

If the startup is based in London or another area with high living costs, use this as a salary bargaining tool.

Conclusion

Startup salary rates vary and are linked to the job, the candidate’s skills and experience, and the startup’s financial resources.

Businesses need to offer competitive salary packages to attract the right staff. Cash flow restraints can be balanced by offering key staff equity compensation in place of a higher salary.

This can help startups maintain budgets and motivate ambitious talent to join and have a stake in the business’s success, but it can be a complicated process, so be sure to get advice from a financial or legal professional.