Balancing guaranteed cash with long term ownership upside
Salary is a fixed cash payment made regularly regardless of company performance, taxed as ordinary income as it is earned. Equity, whether shares or options, gives the recipient a stake in future company value, which could be worth a great deal or nothing at all depending on how the company performs. Startups often use equity to compensate for below market salary, especially at seed and Series A stage when cash is scarce, which is one reason equity management matters early on.
- Salary must be paid whether or not the company succeeds, drawing down cash reserves
- Equity has no cash cost to the company but dilutes existing shareholders
- Equity value depends entirely on a future sale or exit event, salary is realised immediately, so the exit payout mechanics decide what a grant is worth
- A combination of below market salary plus equity is the most common structure at early stage European startups
Risk and reward across cash and equity components
| Feature | Equity | Salary |
|---|---|---|
| Cash cost to company | None | Ongoing, monthly |
| Value to employee if company fails | Zero | Full amount, as long as paid |
| Tax timing | Usually later, on exercise, vesting or sale | Immediate, each pay period |
| Effect on cap table | Dilutes shareholders | No effect |
| Attractiveness to risk averse candidates | Lower | Higher |
Optimising compensation mix for startups and scaleups
Cash constrained early stage startups typically weight compensation towards equity to preserve runway, accepting that this only appeals to candidates comfortable with risk. As a company raises larger rounds and revenue grows, salaries typically move closer to market rates, with equity becoming a smaller top up rather than the main incentive. Senior hires joining at a later stage, when risk is lower, usually expect salary closer to market rate with a modest equity grant rather than a large stake with low pay, granted through the same stock options mechanics used earlier on.
This page is general information about compensation structure, not advice on how to set pay or comply with local employment or tax law.
Balancing cash and equity: what founders ask
- How much equity should replace a shortfall in salary?
- There is no fixed formula. Companies typically size grants against a percentage of the company and expected vesting period, then judge whether that feels fair relative to the salary gap and risk taken on.
- Does equity reduce payroll tax and social charges?
- It can, since many equity instruments are not treated as salary for social charge purposes, but this depends heavily on the country and the instrument used.
- Should equity replace salary entirely?
- This is uncommon and risky for the employee, since equity may never pay out, and most employment laws require at least a minimum wage to be paid in cash.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.