Equity vs. Salary: How to Structure Your First 5 Hires (The Complete Framework)

You just got your first term sheet from an investor.

Or you’re bootstrapping and finally have £200K in the bank.

You’re ready to hire. You know you need a developer, a salesperson, maybe a designer.

Then you look at market salaries:

• Mid-level developer: £55K-£70K
• Sales hire: £45K-£60K + commission
• Designer: £40K-£55K

Your budget: £35K-£45K per person.

You panic. How do you compete?

The answer: equity.

But then come the terrifying questions:

• How much equity should I offer?
• What if I give away too much too early?
• How do I even explain equity to someone who’s never had it?
• What’s the right balance between salary and equity?

I’ve helped 400+ startups navigate this exact conversation over 20 years. I’ve seen founders give away 10% to employee #3 (disaster). I’ve seen founders offer 0.1% equity with below-market salary (nobody accepts).

Here’s the framework I use to help founders structure compensation for their first 5 hires – so you attract great people without bankrupting yourself or giving away your company.

THE FUNDAMENTAL TRUTH ABOUT STARTUP COMPENSATION

Before we dive into numbers, you need to understand this:

Startup compensation is a trade-off: salary + equity + opportunity = total package

Corporate jobs offer:

• High salary
• Zero equity
• Limited opportunity (you’re cog #5,847)

Startup jobs offer:

• Lower salary
• Meaningful equity
• Massive opportunity (you’re building the company)

The question isn’t “salary OR equity.” It’s: What combination makes sense for this person, at this stage, in this role?

THE 4 FACTORS THAT DETERMINE YOUR EQUITY/SALARY MIX

Factor 1: Your Funding Stage

Pre-seed / Bootstrapped (£0-£300K raised):

• Cash is tight
• High equity, lower salary
• Target: 20-40% below market salary, 0.5-2% equity

Seed (£300K-£1M raised):

• Some breathing room
• Moderate equity, moderate salary
• Target: 10-20% below market salary, 0.3-1.5% equity

Series A (£1M-£5M raised):

• Competitive salaries possible
• Lower equity, market-rate salary
• Target: Market salary or 10% below, 0.1-0.5% equity

Why this matters: Early hires take more risk. They deserve more equity. Later hires join when success is more certain. They get more cash, less equity.

Factor 2: The Role’s Impact

Founding Team-Level Roles (CTO, VP, Head of X):

• They’re building the foundation
• High impact on success/failure
• More equity: 1-5%

Core Team Roles (Senior Engineers, Sales Lead, Design Lead):

• Critical to execution
• Significant impact
• Moderate equity: 0.25-1.5%

Execution Roles (Junior Engineers, Sales Reps, Coordinators):

• Important but less strategic impact
• Lower equity: 0.05-0.5%

Why this matters: Equity should reflect impact. Your founding team-level hires are taking massive bets on you. Junior hires are getting valuable experience.

Factor 3: The Candidate’s Situation

Corporate Employee (Stable Job, Good Salary):

• Taking real financial risk to join you
• Needs competitive salary OR significant equity to justify risk
• Lean toward market salary with solid equity (0.5-1%)

Startup Veteran (Been Here Before):

• Understands equity value
• Often willing to take lower salary for meaningful equity
• Lean toward 20-30% below market salary with higher equity (1-2%)

Early Career (1-3 Years Experience):

• Lower salary expectations
• Excited by learning opportunity
• Can offer 10-20% below market with moderate equity (0.25-0.75%)

Why this matters: Someone leaving a £70K corporate job needs different incentives than someone making £35K at another startup.

Factor 4: How Much Value They’ll Create

This is subjective but critical.

Your first salesperson who will build the entire sales engine:

• Creating massive value
• Higher equity: 0.75-2%

Your third engineer who’s executing on an established roadmap:

• Important but not building the foundation
• Lower equity: 0.25-0.75%

Why this matters: Equity rewards future value creation, not just current skills.

THE EQUITY BENCHMARKS: EMPLOYEES 1-5

Here are realistic equity ranges based on 400+ placements. These assume you’re seed-funded or well-capitalised bootstrapped (£300K-£1M in the bank).

EMPLOYEE #1: Your First Key Hire

Typical Role: Lead Engineer, Head of Product, First Salesperson, Head of Operations

Equity Range: 1-3%

Why So High:

• They’re joining when you have 0-2 people
• Massive risk
• They’ll build systems from scratch
• Early equity is more valuable (lower valuation)

Salary:

• Senior level: £45K-£60K (vs. £60K-£80K market)
• Mid level: £35K-£50K (vs. £45K-£65K market)

How to Pitch It: “You’re joining as employee #1. You’ll build [function] from the ground up. In 18 months, if we raise Series A, this 2% could be worth £100K-£300K. In 5 years, if we exit at £50M, you’re looking at £1M.”

Real Example: Emma hired James as her first engineer. James was making £65K at a fintech scale-up.

Offer: £48K salary + 2.5% equity

James took it because:

• He wanted to build from scratch
• The equity was meaningful (not token)
• Emma showed him valuation scenarios

18 months later at Series A: His 2.5% was worth £250K on paper.

EMPLOYEE #2-3: Core Team Building

Typical Roles:

• Second/Third Engineer
• First Designer
• Second Salesperson
• Operations Manager

Equity Range: 0.5-1.5%

Why Lower Than #1:

• Still early but less risk (you have traction now)
• They’re joining a small team (not solo)
• Important but not founding-level impact

Salary:

• Senior level: £50K-£65K (vs. £60K-£80K market)
• Mid level: £38K-£52K (vs. £45K-£65K market)

How to Pitch It: “You’re joining as one of our first 3 employees. You’ll have massive influence over how we build [area]. This 1% equity stake means you own a meaningful piece of what we’re creating.”

EMPLOYEE #4-5: Team Expansion

Typical Roles:

• Junior/Mid Engineers
• Sales Reps
• Customer Success Lead
• Marketing Hire

Equity Range: 0.25-0.75%

Why Lower:

• You’re now 5-7 people (less risky)
• Likely have product-market fit signals
• More structure exists

Salary:

• Senior level: £55K-£70K (vs. £60K-£80K market)
• Mid level: £40K-£55K (vs. £45K-£65K market)
• Junior level: £30K-£42K (vs. £35K-£50K market)

How to Pitch It: “We’re growing fast. You’re joining at a stage where you can still shape the culture and your function. This 0.5% equity gives you ownership in what we’re building together.”

THE VESTING STRUCTURE (DON’T SKIP THIS)

Equity without vesting is a disaster waiting to happen.

Standard Vesting: 4 years with 1-year cliff

What This Means:

• Total equity vests over 4 years (25% per year, or ~2% per month)
• 1-year cliff: They get 0% if they leave before 12 months, then 25% unlocks at month 12
• Remaining 75% vests monthly for the next 3 years

Why The Cliff Matters:

If employee #1 quits at month 6, they walk away with 0%.

If they stay 12 months but then quit, they take 25% of their equity (0.5% if you gave them 2%).

This protects you from:

• People who join and immediately quit
• Bad hires who don’t work out
• People who lose motivation after 6 months

Early Exercise (Advanced): Some startups offer “early exercise” where employees can buy their unvested shares at the current strike price. This can save them significant tax if the company grows.

Discuss with a lawyer. Don’t DIY this.

COMMON MISTAKES FOUNDERS MAKE (AND HOW TO AVOID THEM)

Mistake 1: Giving Too Much Equity Too Early

I’ve seen founders give employee #3 5% equity because “they’re critical.”

Then employee #7 asks: “Why did I only get 0.5% when person #3 got 5%?”

The Fix: Use the benchmarks above. If someone asks for more, explain the fairness framework: “Employee #1 joined when we had 0 revenue and 2 people. You’re joining at £50K MRR with 7 people. Risk is lower, equity is proportional.”

Mistake 2: Offering Equity Without Context

Bad: “We’re offering you 1% equity.”

Candidate: “Is that good? I have no idea.”

The Fix: Explain what it could be worth:

“We’re offering 1% equity. Today, the company is valued at £2M, so your 1% is worth £20K on paper. But here’s what could happen:

• In 18 months, if we raise Series A at £10M valuation: Your 1% = £100K
• In 3-5 years, if we exit at £50M: Your 1% = £500K
• If we get acquired for £100M: Your 1% = £1M

Of course, we might not exit. Startups are risky. But that’s the potential upside.”

Mistake 3: Using Equity to Avoid Paying Market Salary

Offering £30K salary + 0.25% equity for a £60K role doesn’t work.

Why: Great candidates can do the maths. They know:

• 0.25% × £50M exit (very optimistic) = £125K
• Over 5 years = £25K/year
• You’re still £5K below market annually

The Fix: If you truly can’t afford market rates, offer meaningful equity (1%+) and be honest:

“We can only pay £40K right now, which I know is below market. Here’s why we think the equity makes up for it: [show scenarios]. If this doesn’t work for you, I totally understand.”

Honesty builds trust. Lowballing destroys it.

Mistake 4: Not Getting Legal Documents Done Properly

I’ve seen founders give equity via email: “You’ll get 2%, we’ll sort paperwork later.”

Then later never comes. Or it comes with disputes.

The Fix: Work with a startup lawyer to create:

• Stock option agreements
• Vesting schedules
• Exercise terms
• 83(b) elections (if relevant)

Cost: £1,500-£3,000 upfront. Worth every penny.

HOW TO HAVE “THE EQUITY CONVERSATION” WITH CANDIDATES

Most candidates have never had equity. You need to educate, not just offer.

The Framework:

Step 1: Explain What Equity Is

“Equity means you’ll own a small percentage of the company. As the company grows in value, your equity grows in value. If we exit (get acquired or go public), you get paid based on your ownership percentage.”

Step 2: Explain The Numbers

“We’re offering you 1% equity. The company is currently valued at £2M. Your 1% is worth £20K on paper today.

But here’s what matters: what happens in the future. If we grow to a £50M valuation and exit, your 1% could be worth £500K. If we grow to £100M, it’s £1M.”

Step 3: Be Honest About Risk

“Equity is risky. Most startups fail. If we fail, your equity is worth £0. That’s why we’re also offering [salary], which is guaranteed.”

Step 4: Show Them The Vesting Schedule

“Your equity vests over 4 years. That means if you stay for 1 year, you’ll have earned 25% of your 1% (0.25%). If you stay 4 years, you’ll have earned 100%.

This protects both of us. We’re investing in each other for the long term.”

Step 5: Answer Their Questions

Common questions:

• “What’s the strike price?” (what they pay to exercise options)
• “When can I exercise?” (usually when you leave or at exit)
• “What happens if I leave before 4 years?” (you keep vested equity)
• “What if you raise more funding?” (their % gets diluted, but the company is more valuable)

Be prepared. Honesty builds trust.

THE SALARY + EQUITY COMBINATIONS THAT ACTUALLY WORK

Based on 400+ placements, here are proven structures:

STRUCTURE 1: HIGH EQUITY, LOW SALARY

• Best for: Employee #1-3, startup veterans
• Example: £40K salary + 2% equity (for £60K market role)
• When it works: Candidate understands equity value, believes in your mission, can afford lower salary

STRUCTURE 2: MODERATE EQUITY, MODERATE SALARY

• Best for: Employee #3-5, cautious risk-takers
• Example: £50K salary + 0.75% equity (for £60K market role)
• When it works: Candidate wants some upside but needs security

STRUCTURE 3: LOW EQUITY, MARKET SALARY

• Best for: Employee #7+, risk-averse candidates
• Example: £60K salary + 0.25% equity
• When it works: You’re well-funded, candidate prioritises cash

STRUCTURE 4: TOKEN EQUITY, ABOVE-MARKET SALARY

• Best for: Specialists you need urgently
• Example: £70K salary + 0.1% equity (for £60K market role)
• When it works: You’re flush with cash, candidate doesn’t care about equity

THE EQUITY POOL: HOW MUCH SHOULD YOU RESERVE?

Standard equity pool for first 10-15 employees: 10-15%

Breakdown:

• Employees #1-3: 5-7% total
• Employees #4-10: 5-7% total
• Buffer for key hires: 2-3%

What happens when you raise funding: Investors will ask you to set aside an option pool (typically 10-15%). This dilutes everyone (including founders).

Plan for this. Don’t give away 20% to your first 5 hires, then realise you have nothing left for employees #6-20.

THE BOTTOM LINE

For Employee #1-2: 1-3% equity, 10-30% below market salary
For Employee #3-5: 0.5-1.5% equity, 10-20% below market salary
For Employee #6-10: 0.25-0.75% equity, 5-15% below market salary

Always use: 4-year vesting with 1-year cliff

Always explain: What the equity could be worth and the risks involved

Never: Give equity without proper legal documentation

READY TO HIRE YOUR FIRST TEAM?

Equity structures are just one piece of the puzzle. You also need to find people who are actually startup-ready, understand the trade-offs, and will thrive in chaos.

That’s where Chemistry First hiring comes in.

Inside, you’ll get:

• Equity calculator template (plug in your numbers)
• Salary benchmarks by role and location
• “How to explain equity” script for candidate conversations
• Vesting schedule template
• Offer letter template including equity terms

Let’s talk about your first hires – who you need, how to structure compensation, and how to attract people who understand startup risk.