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RE: Startup Blabber #005: The Cap Table
As for the early employees, they are basically giving up their existing future to come and work for you. I like to compensate these people with shares of the company. I tend to go about it by seeing what their current salary is, reducing it slightly in terms of monetary compensation, and adding about a year's worth of compensation in stock options/grants according to the seed investment valuation estimate. Again, this is not fixed math, and usually resorts to some sort of negotiation in the beginning.
I really do like this practise. Gives someone who is with a company right from the start a feeling of actually belonging instead of just tagging along.