What Is a Fair Deal for a Startup’s First Engineer?

Starting a company can be exciting, but it also presents a fair share of challenges. One of the biggest hurdles is setting the appropriate pay for the first engineer who joins the fledgling startup. They are taking a huge risk by jumping aboard, so they will want something that reflects that. However, it is also vital to consider what is fair for the founders who got the ball rolling in the first place.

Balancing pay, equity, and title for that first technical hire requires a deep understanding of everyone's contributions. It also involves setting expectations upfront. Having a good grasp of startup compensation norms ensures a fair distribution of resources as the company continues to grow.

Determining Cash Compensation for a Startup's First Engineer

There are diverse factors to consider when negotiating pay for a startup's first engineer. For the startup, funding constraints mean they cannot match the pay of an established tech company. However, to land a qualified engineer, they need to offer a competitive package. This often includes a blend of cash, equity, and career growth opportunities.

• Base Salary

Based on the data released by Salary.com, the average base pay for a software engineer in the U.S. is $125,916. The startup will need to offer at least the typical salary for an engineer in their city to be viable. They can offer pay slightly below the average by highlighting future growth and equity potential.

• Equity

Since startups cannot match established companies in base pay, equity becomes a vital part of the package. Most startups offer 0.67-2% equity in the company, vesting over 4 years. The first engineer, as an early team member, receives a higher end of that range, around 1-2% equity.

• Bonus and Benefits

Other startups offer bonuses, healthcare insurance, retirement benefits, and other perks. While less common in early-stage startups, these additional benefits can make the package more attractive.

Open communication and reasonable expectations enable a startup and their first engineer to find a fair deal that works for everyone. By balancing pay, equity, and growth opportunities, both parties can build a partnership poised for success.

Setting the Appropriate Equity Share for First Engineer

A fair equity share for a startup's first engineer ranges from 1% to 2%. It varies depending on factors like experience, skills, and risk tolerance. Founders must consider the value this role will provide in building the product and company culture. An engineer with specialized skills or a successful track record can demand an offer at the higher end.

New engineers often take a risk by joining an unproven startup. So, equity can offset a potentially lower pay and align their interest with company success. However, offers that are too high can create resentment among later hires and imbalance cap tables down the road. Striking the right balance is key.

Another factor to weigh is the title and scope of duties. A lead engineer overseeing product development may merit additional equity. While a mid-level engineer focusing on implementation may receive less. Equity shares must reflect the impact and leadership of the role.

Equity must vest over 3-4 years to promote long-term retention. Around 25% vesting after one year is common, with remaining shares vesting quarterly or monthly thereafter. Vesting motivates engineers to build value over time, not just cash out quickly.

With risks and rewards considered, an offer of 1-2% equity for a startup's first engineer is a fair deal. Keeping these guidelines in mind will help startups attract and retain the talent they need to succeed.

Titles and Responsibilities Appropriate for First Engineer

The first engineer typically takes on various responsibilities and wears different hats. They are crucial in building the initial product and technical infrastructure. As such, titles are common for a startup's first engineer.

• Lead Engineer

The Lead Engineer manages the technical direction and architecture of the product. They design systems, mentor other engineers as the team grows, and ensure high coding standards. The title implies the person is taking charge of the startup's technology and product.

• Senior Software Engineer

If the startup is not prepared for an engineering manager or "lead," Senior Software Engineer remains a suitable title. It gives due respect for the experience and skills without the management expectations of a lead role. The Senior Software Engineer works closely with the founders to make key technical decisions. They are also in charge of building the first versions of the product.

• VP of Engineering

For an experienced engineer with startup experience, the VP of Engineering title may be fitting. This role builds and manages the entire engineering team and technical operations. It is also responsible for hiring and mentoring engineers, overseeing product development, and ensuring the startup's technical success. Not all startups will be ready for a VP-level role. However, for the right candidate with a proven track record, it can be an excellent title.

Whatever the title, the first engineer plays a vital role in developing the startup's technology and product. Their responsibilities are broad, including making key decisions and building the first versions of the product. They are also responsible for establishing best practices and helping shape the overall technical vision. For the right engineer, it is a chance to make an impact and contribute to building something great.

Conclusion

Briefly, there is no one-size-fits-all answer for what is fair pay for a startup's first engineer. It really comes down to the specifics of each situation. Factors include the stage and funding of the company, the engineer's skills and experience, the equity available, and the tasks involved. The key is to consider market rates, negotiate respectfully, and find a package that works for both sides.

With the right balance of cash and equity, plus a seat at the table, that first engineer can secure a sweet deal. However, it is still crucial to ensure the terms are clear upfront to avoid issues down the road. With a little flexibility and transparency, both the company and engineer can thrive.