5.12Equity, ESOPs and compensation

Trading off cash and equity in offers

Stage: SeedCore

1. The core idea#

Every startup offer is a mix of cash (salary, bonus) and equity. Early on, cash is scarce and equity is plentiful, so founders lean on equity. But people pay rent in cash, and equity is illiquid, risky and diluted over time. The right mix depends on the candidate's circumstances and risk appetite, the company's stage, and the local market.

Three practical ideas make this easier:

  1. Set salary bands first, then equity. Pay a fair base salary for the stage, usually somewhat below big-company levels, then size equity to the role and level (5.04, 5.13). Don't use equity to cover a salary that is too low to live on.
  2. Offer a menu, not a negotiation. Give senior candidates two or three combinations of salary and equity at a fixed "exchange rate" (for example, each ₹1 lakh of salary given up buys a set number of options). It respects their situation and avoids ad hoc bargaining.
  3. Value equity honestly. Show what the equity could be worth at realistic exits after dilution and preferences (5.11), not at the last round's paper price.

The goal is a team that wants equity because they believe in the company, not one that accepted it because there was no alternative, and a cap table that isn't burned on people who would have preferred cash.

Who this is for: founders making senior and early offers; anyone negotiating with candidates from big companies or academia.

Pairs with: 5.04 (equity by level), 5.11 (explaining equity), 5.13 (salary benchmarks), 5.14 (PhDs and scientists), 3.13 (founder pay).

2. What the evidence says#

Startup salaries have risen; equity has swung. Carta reported that the average salary for new startup hires in June 2025 was 5.8% higher than in April 2022. From January 2024 through February 2026, the median salary at startups valued at $1 million or more rose 5.1%, while the median equity package rose 13%; at startups valued between $10 million and $25 million, initial grant sizes rose 52%. Some commentators, citing Carta, note equity grants fell substantially after 2022 before this rebound.

Salary differences by stage are modest; equity differences are large. Carta found a data science director earned about $188,000 at a $30 million startup and about $215,000 at a $300 million company, a 14% gap, while the equity upside differed much more. So the main thing an early-stage offer trades is equity percentage, not a deep salary cut.

Regional differences. Carta's 2026 APAC and MEA report found the median first hire at an APAC or MEA startup received 0.505% of the company, against 0.731% in the US. Indian candidates typically expect more of their pay in cash and value equity at a steeper discount, partly because of perquisite tax at exercise (5.08) and fewer liquidity events historically.

Candidate preferences shift with the market. EquityBee reported that, over a six-month period in a downturn, the share of startup employees who would prefer a higher salary over a bigger option package doubled from 34% to 67%. Yet in Sifted's survey, two-thirds of European startup employees with options said they wouldn't have joined without them. Both are true: people want equity as upside, but not at the cost of financial stress.

AI changed the pattern at the top. Carta's 2026 data showed that at AI startups between seed and Series B, executives with the highest salaries were landing in the lowest equity quintiles, and vice versa, an inverse relationship rather than the usual higher-salaryhigher-equity pattern. That is effectively a market-wide cash-for-equity menu.

3. The method#

Step 1: Set a salary floor#

For each level, set a base salary band for your stage and location (5.13). Early-stage startups typically pay somewhat below large-company base salaries, and well below bigcompany total pay including liquid stock. Don't go below what someone needs to live without financial stress; it hurts performance and retention.

Step 2: Set the default equity grant#

From your equity bands (5.04, 5.05), set the default grant for the level.

Step 3: Define an exchange rate#

Decide how much equity you'll give for each unit of annual salary a candidate gives up, and the reverse. A common approach:

  • Value equity at the latest preferred price (paper value), spread over the vesting period.
  • Require a premium for risk: for example, each ₹1 (or $1) of annual salary given up buys ₹2–3 of annual paper equity value. The multiplier reflects illiquidity, dilution and failure risk, and should be higher at earlier stages.
  • Cap the menu: salary no lower than a floor, equity no higher than a cap for the level.

Step 4: Present a menu#

Offer two or three combinations, with the middle one as the default. Explain the exchange rate openly, so the candidate understands it is consistent for everyone.

Step 5: Revisit after funding#

After a priced round, bring people who chose lower salaries up to the new bands, and keep their extra equity. That rewards those who took more risk.

Worked example#

An Indian battery-materials startup, last valued at ₹400 crore, is hiring a senior electrochemist whose market salary is ₹45 lakh. The default offer for the level is ₹36 lakh plus 0.45%, vesting over four years. The company uses a 2.5x exchange rate.

Option Salary Equity Paper value of equity per year at₹400 crore
A: more cash ₹42 lakh 0.30% ₹30 lakh
B: default ₹36 lakh 0.45% ₹45 lakh
C: more equity ₹30 lakh 0.60% ₹60 lakh

Moving from A to B gives up ₹6 lakh a year in salary for ₹15 lakh a year in paper equity value, a 2.5x ratio; the same from B to C. The candidate, with a young family and a home loan, chooses A. A second candidate, a postdoc with savings and a high belief in the technology, chooses C. Both understand the trade, and neither feels the company took advantage of them. After the Series A, the company raises A-option and C-option salaries to the new band, keeping equity unchanged.

4. Country notes: India, US, UK#

India.

  • Cash expectations are higher. Indian candidates, especially experienced ones, often expect most of their pay in cash and annual increments, and frequently compare against multinational offers with RSUs. Equity is valued at a steep discount unless the company has a track record of buybacks or a credible path to IPO.
  • Tax reduces the value of options for many employees: perquisite tax at exercise unless the company qualifies for the deferral (5.08). Explaining this honestly helps candidates compare offers.
  • Salary structure: under the Labour Codes, at least 50% of pay must count as wages for social security purposes, which affects how a lower salary is structured (4.09).
  • Retention bonuses paid in cash after 12–24 months are a common alternative to more equity for candidates who value cash.

US.

  • Startup salaries track the market closely at seed and later. Deep salary discounts are mostly for the very first hires and founders.
  • Pay transparency laws in several states require salary ranges in job postings, which limits case-by-case salary trades; equity menus are less affected.
  • ISOs and AMT: larger option grants for lower salaries can mean bigger AMT exposure at exercise (5.08). Mention it to candidates choosing more equity.

UK.

  • EMI makes equity relatively more attractive for UK employees because of favourable tax treatment, so more candidates may take equity-heavy options.
  • The £250,000 EMI limit per employee caps how much equity can go into EMI for very senior hires at higher valuations; beyond that, unapproved options are taxed less favourably.
  • National minimum wage rules set an absolute floor on salary for employees, including in very early startups.

Academics and PhD scientists (5.14) often accept lower salaries for meaningful equity and research freedom, but may have little savings. Menus help them choose without feeling pressured.

Scripts#

Presenting a menu:

"We have a consistent way to let people choose between more cash and more equity. Here are three versions of the offer. Every ₹1 of salary you give up buys ₹2.5 of equity at our last round's value, reflecting the risk. Pick whichever suits your situation; there's no wrong answer, and we won't think less of anyone who picks the cashheavy one."

When a candidate asks for more salary and the budget is fixed:

"We can't move base salary beyond [x] at this stage, but we can increase equity by [y] using our standard exchange rate, or add a retention bonus of [z] after 12 months. Which matters more to you?"

When a candidate asks for more equity than the cap:

"[x]% is the maximum for this level so that we stay fair to the team. If we hit

[milestone], refresh grants are how we'll keep rewarding the people driving it."

Common mistakes#

  1. Using equity to justify unliveable salaries.
  2. Ad hoc trades that differ by how hard each person negotiates.
  3. Valuing equity at the preferred price without a risk discount.
  4. Not revisiting salaries after funding for those who took less cash.
  5. Ignoring tax (India's perquisite tax, US AMT) when offering equity-heavy options.
  6. Giving away too much equity early to people who would have preferred cash.
  7. Forgetting local wage rules and statutory pay structures.
  • 3.13 Paying founders before and after funding
  • 5.04 Allocating equity by level
  • 5.11 Explaining equity to employees: offer letters and equity education
  • 5.13 Salary benchmarks for startups in India and the US
  • 5.14 Paying PhDs and scientists compared with engineers
  • 5.17 Bonuses, commissions and sales compensation plans

Sources#

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