How to Pay Employees During a Startup

You're probably here because you're about to make your first real hire, someone good has asked what the salary is, and you've suddenly realized you don't actually know what a startup is supposed to pay.

Maybe you have $300,000 in the bank and you're wondering whether an $80,000 employee is affordable. Maybe someone is willing to take less cash for equity. Or maybe you've been using contractors so far and you're trying to work out when that stops making sense.

All of these are really the same problem: how do you pay good people without burning through the company before those people have a chance to make an impact?

Let's untangle it.

The first thing to understand: you're not just deciding a salary

When a larger company hires someone, salary is usually the main number. At a startup, especially an early one, compensation is more of a package: cash, equity, benefits, flexibility, risk, and sometimes the chance to have a much bigger role than the same person would get somewhere else.

That's why comparing your offer directly with a large company can be misleading.

You may not be able to match their salary. They probably can't offer the same ownership, influence, or upside either.

The trick is not pretending those things are worth the same to everyone. Some people will happily trade $20,000 of salary for meaningful equity. Someone with a mortgage, two kids, and no appetite for startup risk may quite reasonably prefer the cash.

So don't start with "startups pay 20% below market." Start with what the role is worth in the market, what your company can actually afford, and how much risk you're asking this particular employee to take.

Our Startup Compensation: Salary Bands and Benefits guide goes deeper into setting salary bands and balancing cash with equity.

Salary versus equity is the real early-stage tradeoff

Here's where this usually becomes real.

You've found a senior engineer you really want. They can make $150,000 somewhere established. You can comfortably afford $115,000.

One option is to simply lose them.

The other is to make the difference in the overall package more interesting: $115,000 plus equity, more responsibility, and a credible explanation of what they're joining.

That is a perfectly normal startup conversation. Carta's compensation data shows that salary and equity remain the two major pieces of startup compensation, and that companies increasingly benchmark them together rather than treating equity as a random number added at the end of an offer.

What you don't want to do is use equity as magic money.

"Your salary is terrible, but you'll own part of the company" only works if the equity is actually meaningful and the employee understands what they're getting. Ten thousand options sounds impressive until nobody can explain how many shares exist, what the exercise price is, or what happens if the employee leaves.

That's why a good offer explains both parts clearly.

If you're granting options, our Employee Stock Options for Startups guide covers option pools, vesting, cliffs, and the differences between Canada and the US.

Equity is cheap today and potentially very expensive later

This is the part founders tend to underestimate.

When the company is worth almost nothing, giving away 1% or 2% can feel fairly painless. There isn't much value there today, so the number feels theoretical.

If the company works, it stops being theoretical.

That doesn't mean you should be stingy with equity. Early employees are taking real risk and should have a chance to participate in the upside they help create. It just means grants should be deliberate.

Most startups deal with this through vesting. A typical structure is four years with a one-year cliff: the employee earns nothing if they leave very early, then begins earning the grant over time. Carta describes four-year vesting with a one-year cliff as a common startup structure.

The other mistake is creating an option pool by picking a nice round number like 10% because someone on Twitter said that's what startups do. A better approach is to look at the people you genuinely expect to hire before the next financing round and work backwards from those grants. Carta recommends sizing the pool around the actual hiring plan rather than choosing a percentage by default.

In other words, equity is compensation. Treat it like compensation, not confetti.

Your $80,000 employee doesn't cost $80,000

This catches a surprising number of founders on their first few hires.

You agree on an $80,000 salary, put $80,000 into the spreadsheet, and assume that's the annual cost.

It isn't.

There are employer payroll contributions, vacation, equipment, software, benefits if you offer them, insurance, recruiting costs, and sometimes bonuses or commissions. The exact list depends on where the employee works.

In Canada, for example, employers are responsible for payroll deductions and employer portions of CPP and EI. The CRA publishes current payroll deduction tables and a calculator for this.

You don't need a complicated finance model for your first hire, but you should budget the fully loaded cost rather than the number printed at the top of the offer letter.

That matters because hiring decisions are really runway decisions.

The runway question matters more than the salary question

Say you have $400,000 in the bank.

An employee costing you roughly $100,000 a year might look affordable. Four of them probably don't leave you with twelve months of runway, because payroll isn't your only expense.

You still have founders, hosting, software, legal bills, accounting, marketing, insurance, travel, contractors, and all the strange little bills startups collect as they grow.

So instead of asking, "Can we afford an $80,000 employee?" ask, "What does our monthly burn look like after we hire them?"

That's a much more useful question.

If the hire cuts your runway from eighteen months to eleven months, maybe that's completely fine. Perhaps they're a salesperson who can materially change revenue, or an engineer who gets the product launched six months earlier.

But now you're making an informed trade.

The dangerous hire is the one that gets made because everyone feels busy, the funding round just closed, and adding another person feels like progress.

Carta's latest startup compensation data points to smaller teams becoming more common, particularly at venture-backed companies, while compensation for the people who remain has increased. At seed stage, Carta reported a median team size of just four employees in its 2026 data.

That doesn't mean four is the magic number. It does mean "hire more people" isn't automatically the same thing as "build faster."

Contractors are useful until they're really employees

Most startups start with contractors somewhere.

A freelance designer for a redesign makes sense. So does a fractional marketer, part-time bookkeeper, or specialist developer working on a defined project.

The line gets less clear when the contractor is working forty hours a week, only works for you, follows your schedule, reports to your managers, and has effectively become part of the company.

At that point, calling them a contractor doesn't necessarily make them one.

This matters for payroll, taxes, employment protections, and potentially what you owe the person later. In Canada, the CRA looks at the actual working relationship when determining whether somebody is an employee or self-employed, rather than relying solely on the wording of the contract.

For the broader first-hire setup, including payroll, contracts, IP assignment, and when HR processes start becoming necessary, see our Startup HR Checklist.

And yes, founders should usually pay themselves eventually

There's a strange badge of honour in startup culture around founders paying themselves nothing.

In the first few months, that can be completely normal. If you're bootstrapping something on evenings and weekends, there may simply be nothing to pay.

It gets less sensible once there's real money in the company.

If you've raised $2 million and you're still paying yourself $0 while worrying about how you're going to cover rent, you're not necessarily helping the startup. You're just adding personal financial pressure to an already stressful job.

Pilot's 2025 founder salary survey found that 60% of founders surveyed paid themselves under $100,000, but only 5.4% reported taking no salary at all.

That's probably the healthier way to think about it. The goal isn't to pay yourself a corporate executive salary. It's to pay enough that your personal finances don't become another company problem.

Where this usually goes wrong for founders

The biggest mistake isn't paying someone $10,000 too much or too little.

It's hiring without being clear about why the person needs to exist.

A funding round closes and suddenly the company goes from five people to fifteen because there is finally money to hire. Six months later, the burn rate is enormous and nobody can quite explain what five of those new roles changed.

The opposite can be just as expensive. A founder tries to save every dollar, pays well below market, gives vague promises about equity, and then loses the exact people the company depended on.

The better pattern is fairly simple: know what the role should accomplish, benchmark what someone good actually costs, decide what mix of cash and equity you can afford, and model what happens to runway before you make the offer.

You're not trying to find the cheapest person who will say yes. You're trying to hire someone who creates more value than the cash and equity you're giving up to bring them in.

That is why hiring ends up being connected to almost every other startup decision. Your team changes your burn. Burn changes how quickly you need revenue or another financing round. And that changes how aggressively you need to sell, market, and grow.

At ShoutEx, we usually see this from the go-to-market side. A founder thinks they need three salespeople when the actual problem is positioning. Or they hire a full-time marketing team when one strong generalist and a couple of specialists would have bought them another year of runway.

Sometimes you need the hire. Sometimes you need a contractor. Sometimes you need to fix the problem before hiring anybody into it.

For the larger picture, our Startup HR for Founders guide covers the HR decisions from your first employee through roughly 50 people.

FAQ

Should startups pay below-market salaries?

They can, especially at an early stage, but there should be a reason the overall package is still attractive. Usually that means more equity, more responsibility, or both. Simply being a startup doesn't automatically make a weak salary competitive.

How much equity should an early employee get?

It depends heavily on seniority, stage, valuation, and how much salary they're giving up. Benchmark the role rather than using the same percentage for everyone, and model the grant as part of your overall option pool.

Is four-year vesting with a one-year cliff standard?

It's very common. Nothing typically vests during the first year, then a portion vests at the cliff and the remainder continues vesting over the following years.

Should I hire a contractor instead of an employee?

If the work is genuinely independent, project-based, or fractional, possibly. If the person functions like a full-time employee, don't assume a contractor agreement automatically makes them one.

Should startup founders take a salary?

Once the company has sufficient revenue or funding, usually yes. The salary should be reasonable for the company's stage and cash position rather than designed to maximize what the founder can take out.

How should I calculate whether I can afford a hire?

Use the total cost of the employee and recalculate your monthly burn and runway after the hire. The salary by itself isn't enough.

Related resources

Carta. (2026). State of Startup Compensation: H2 2025.

Pilot. (2025). Founder Salary Report 2025.

Carta. (2026). What Is an Option Pool? A Guide for Startup Founders.

Canada Revenue Agency. (2026). Payroll Deductions Tables.