In the early stages of a startup, one critical element that many founders struggle with is compensation. It’s not just about money; it’s about aligning your team’s motivations and keeping everyone happy and productive. Getting compensation right can be the difference between a team that’s aligned for growth and one that’s drifting apart.

Why Early-Stage Compensation is So Hard

• Maximise runway: Maximising runway is crucial for a project's success. Striking the right balance between fairly rewarding contributors and extending the runway is often key to achieving long-term success.

• Impact on Performance: When people feel their efforts are not adequately rewarded, it can lead to frustration, demotivation, and slacking. Founders can also fall into the trap of giving away too much equity to contributors who don’t deliver the expected value. This often happens when equity is negotiated upfront, only for founders to later realise that the contributor's or cofounder's contributions fall short of expectations.

• Conflict: Inconsistent or unfair compensation structures create resentment and misunderstandings between team members. Not every team member might be right for you. For example, if you are cash-poor, team members who need to be paid significantly in cash are just not the right fit, best to part ways with a handshake than to go into a painful negotiation where neither party will be happy.

The reality is that traditional methods of compensation—flat salaries or equity splits—often fail in early-stage teams because they don’t reflect the dynamic, fast-paced nature of startups. For example, an early equity split might reward team members equally, but as the project evolves, some contributors may put in significantly more effort or take on new roles, while others contribute less.

The Hidden Costs of Getting Compensation Wrong

If you rely solely on cash salaries, there’s little incentive to stick around through tough times. You risk burning through your runway too quickly and struggling to attract top talent, settling for less experienced hires. As cash reserves shrink, the team becomes demotivated, knowing their compensation is unsustainable. Key contributors leave for better opportunities and a tough situation becomes fatal. On the flip side, if you opt for equity compensation but structure it poorly, you face a different problem: some team members feel undervalued while others, who contribute less, hold large equity stakes. Frustration builds, leading to more departures and missed milestones, plus you're giving away your company for nothing.

Negotiating upfront equity is a risky strategy. You don’t yet know the contributor’s commitment, motivations, or long-term fit, but you're giving away ownership—often tied with governance rights. Some companies opt for a fixed percentage based on seniority, but in an early-stage team, the difference in commitment and dedication is often more critical than expertise alone.

When you get compensation wrong in an early-stage team, by the time you’re ready to raise funds, investors see a demotivated, struggling team, and a shrinking runway, you can make your business unviable even before your first round!

Introducing a Better Way: Sweat Equity

Sweat equity refers to compensating team members with ownership in the company rather than cash, but doing so based on actual contributions. Sweat Equity can be used with cofounders, team members, and also advisors, and freelancers to have more people "investing labor" into your business. For early-stage startups, it’s a game-changer:

1. Capital Efficiency: Sweat equity allows teams to extend their runway by minimising upfront cash expenses while still rewarding contributors for their efforts. Fundraising takes a lot of time so sweat equity allows you to focus more on your product and team.

2. Aligns efforts and rewards: Team members see their contributions directly reflected in their compensation, keeping everyone motivated to give their best. No free lunches!

3. Reduces friction: Most startups fail because of team issues but with a clear, transparent, and fair compensation system in place, there’s less room for misunderstandings or conflict.

The critical question is then how do you decide how much equity to give to each contributor?

How to measure value?

A top-down approach—where founders assess everyone’s contributions—is not only burdensome but often inaccurate, since founders may lack full visibility into the daily efforts and contributions of team members. Top-down assessment can also create conflict and resentment from the contributors when they get poorly assessed by the founders.

Research shows that relying on the wisdom of crowds offers a more accurate and balanced understanding of where value is truly being created.

A bottom-up approach means where team members assess each other’s contributions, fosters better alignment and fairness. It also relieves founders from having to track every detail, allowing them to focus on strategic tasks. This collective approach helps create a transparent, trustworthy process, where regular feedback allows contributors to grow and ensures everyone’s contributions are properly valued. A bottom-up approach reduces risks related to compensation AND encourages everyone to improve every cycle.

Peer-to-peer (P2P) assessment offers a simple solution for measuring value in sweat equity. Team members evaluate each other’s contributions, providing a more accurate and fair picture of individual impact. By leveraging collective insights, P2P assessment ensures that contributions are recognized transparently, reducing bias and fostering team alignment.

On the downside, P2P assessments can be a bit time-consuming. However, by leveraging the assessments as constructive feedback and using some automation to reduce admin, P2P assessments become a net positive.

Conclusion: Why Getting Compensation Right Matters

Compensation today shapes your team’s future. Get it right early, and you’ll avoid costly mistakes while positioning your startup for success. Sweat equity helps ensure alignment, motivation, and preparedness for future challenges. And P2P assessments, when done right, enable you to make good decisions, avoid conflict, and have a team that's motivated and constantly improving.

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About Us

At Collabberry, we’re on a mission to help early-stage teams get compensation right. Our tool makes calculating sweat equity a breeze, helping founders like you build happy, productive, and ever-evolving teams.