How to handle comp challenges at every startup stage — Kaitlyn Knopp’s advice from Pequity, Instacart, Cruise & Google

 At the end of the day comp surveys, what's in people's HR information systems. Those were decisions from humans. Like theoretically, I could go out and just choose for the rest of my life to only pay people $100K cash and everything else is equity. I could do that if I want to. And it could be a very valid comp program.

It doesn't mean that you should be doing that, go and read as many resources, but make sure that you also take a step back, maybe read up on some psychology, read up on some IO, psych and reward behavior and how you can incentivize people. Because having that framework that you view all the decisions with is way more powerful than saying, Hmm, I see that Google does total direct comp minus this percentile of salary, plus this bonus cash, whatever.

And that's why I'm going to do they have a reason for it. And you need to understand the reason before you blindly copy and paste that formula onto your org.

 Welcome to in-depth a show that surfaces tactical advice, founders and startup leaders need to grow their teams, companies, and themselves. I'm Brett Berson, a partner at first round, and we're a venture capital firm that helps startups like Notion, Roblox, Uber, and Square tackle company building. First on the in-depth podcast, we share weekly conversations with startup leaders at skip the talking points and go deeper into not just what to do, but how to do it.

Learn more and subscribe today at Firstround.com today's episode of in-depth thrilled to be joined by Kaitlyn Knopp, founder and CEO of Pequity, which automates HR workflows to make compensation more equitable and scalable based on that, you might be able to guess the topic of our conversation today. We of course, are digging into compensation.

Kaitlyn has a deep well of experience here prior to starting Pequity. She built compensation programs and teams that companies like Instacart, Cruise and Google. Ever since first round invested in Pequity's seed round in 2020, I've gotten to see firsthand how Kaitlyn brings this really deep understanding of the space to help companies tackle the messiness of compensation.

It can get complicated really quickly, and there are so many challenges that crop up at every stage. We start our conversation with her advice for the early days and the traps founders need to avoid when they're making their first hires. She sketches out a lightweight framework of how to think about compensation early stage from broad levels to an initial comp philosophy.

We then get into the pros and cons of negotiating offers as well as creative approaches, you can bring to other aspects of comp outside of salary, such as the exercise window. In addition to sharing why she thinks more founders should pursue the part-time contractor to hire route. Kaitlyn also shares tons of tips around how to communicate the value of equity.

Especially with candidates. Who've never worked at a startup before in the back half of our conversation, we dig into comp challenges that come up as a company starts to grow quickly. Caitlin shares advice on retaining existing employees through techniques like equity refreshes. We also get into the psychology of bonuses as well as how to navigate inflation and salary adjustments.

Caitlin shares her take on the recent trend of offering very individualized packages and she ends on the importance of helping employees to fully understand their comp and not shying away from topics like dilution and tax considerations. I really hope you enjoyed this episode. I think it's a great listen for founders and people leaders alike.

And now my conversation with Kaitlin. Well, thank you so 

 much for joining us. Thank you. I'm happy to be here. 

 I wanted to start with some advice, frameworks and philosophies that you've developed specifically around early stage comp. And maybe we could start by talking about the type of company or founder it's two or three people.

Maybe they just raised three or $4 million. Maybe they have one or two employees. And they're beginning to make their first handful of hires. And I'm curious, what are the things to keep in mind advice that you tend to give over and over again, or, or maybe traps to avoid when founders are thinking about what to do next in terms of comp?

 Yeah, absolutely. The early days in a startup, you are just fighting for survival. And I think the most common mistake I do see is that it's very easy to assume that you just have to give it all away. I see a lot of early founders who, because they're desperate for that talent. They're desperate to get that person in.

They really come to the negotiation table, laying out a ton of equity. Oftentimes they can't afford a lot of cash. We'll even stretch on the cash. And I think a good thing to remind early stage founders is. This will pass fairly quickly. Yes, you do need that talent, but you are offering quite a bit by giving someone any equity in the company.

And those early stage employees will definitely get more than the later stage, but a good rule of thumb that I've heard and also employed myself is that the first 10 people shouldn't exceed 10% of your equity pool, even that is a little aggressive, right? Cause that's assuming you're giving 1% to every person, which later stage that would be the equivalent of an exact to give everyone perspective.

A very late growth stage company might give 1% to their newly hired CEO. So that is a lot of equity to offer to someone early. Yes, it will be diluted. Yes. There's all those arguments will come in, but you have to pay attention to those things because it's easy to say yes. When you're small and you'll hear the justification of, well, you have to do this because it's what you need to survive.

But those decisions really do come back to haunt. You. I've had to work with different organizations that have fully distributed their entire equity stock option pool at a very small employee count. They have to pull equity off of investors and their founders it's not a fun process to go through. So keep in mind that you have more leverage than you think you do, and do not assume that you have to go in without a framework.

That's another common one that I see people lunge into is they just offer whatever the employees basically asked for. You can have a simple framework. It doesn't have to be the same framework that Google or Facebook or LinkedIn uses, but to have a simple level structure or some simple philosophy of we do pay at X percenttile, or even we target a $100K and go up and down for this role based on experience those structures.

Even if they're small at two to three employees help immensely later, because when you try to put a structure into. A world where you have 10 to 15 employees and you didn't have that framework before, you're going to have a lot of tough conversations. 

 Can you talk a little bit more about what you think that lightweight structure might look like for those first 10 or 15 hires, what actually should be put together?

 Yeah. There's many ways I've seen people tackle this, but generally speaking, I like to think of it as I have broadly three to four levels of the company. Right. We'll have the people who are. Managing others potentially at that early stage, you probably don't have managers but maybe one or two, you're going to have your junior, potentially people.

Those who might be straight from school, you could think of this as their first time doing the job, not even necessarily the first time doing any job, it could be. They came from sales and they're going to be a recruiter now or vice versa. That would probably be my first level. My mid-level is someone who's probably done this before.

For a couple of years, five to seven years would probably be a good barometer. And then the third level is my very senior people. So this would be if I'm hiring an engineer and they are 10 to 15 years experience, they're getting my principal. That would be that top level. And just by starting to frame people into these levels, you'll start to notice a deviation in comp.

It helps you kind of frame up the conversation for why one person gets more equity than the other. Why one person gets more cash, even if there's a ton of overlap, quote, unquote, as people say between these levels in the cash realm, it can just defend a lot of these decisions, especially as you continue to grow, you'll probably bucket more and more people in here, and you're going to need more than three to four levels later on.

And then just having a very simple philosophy and I stress to all founders. There is free market data out there. There are better market data services than others. You want to be paying close attention to. As you grow, what sources you kind of build your framework onto some very reputable ones would be Radford.

Mercer option impact has free data for people who are venture back. You just have to submit to get it. And within those, just choosing the percentile for similar stage companies to you. So 50th percentile, you know, it's a statistical model. So 50th would be the market average. That's a great place to start and lining up that four level structure against these percentiles that you've chosen for simple jobs that you're hiring will give you a very clear picture.

In most cases, how you should be comping and how you should then be progressing or rewarding those people, because people want to get promoted and move up way quicker than you're usually ready for it. A company you'll get to 10 employees and they're like, wait, I want a promotion. You're like, oh my goodness.

I don't have anywhere to promote you to. And this framework kind of gives you a little wiggle room where you can say, okay, like we will move you from the first level to the second level. Here's a little comp attached to it. And it's consistent as defensible as explainable. And those three words are what you want to have.

We have a good comp philosophy, especially early days. 

 How do you think about negotiating with early employees? Your fourth employee comes in, you have a comp philosophy. And I think this is just a really interesting topic of like negotiating versus non negotiating. And I think there's a lot of different perspectives and I'm sure some of it is very cultural, but curious how you've thought about it and what you've observed 

There's a lot to be said in both directions. I have worked with companies where there's no negotiation. I would say sometimes those cultures are better because people they know they come in like, yeah, this is how comp works here. We don't negotiate. We have this package. This is how it works. However, those orgs, I would say also whether it's just a paranoia or it's actually true in their data, they're afraid of losing their top talent because for those rockstar individuals, the top 10% of your org, if you don't have a way for them to.

Negotiate or wiggle upwards to get more comp for their performance. They are likely to look elsewhere. If you think about your rock star software engineers, who might be building your software for you, that's a very painful concept to have to wrap your mind around. And that's why I think a lot of orgs do lean into negotiation.

It is that pay for performance mentality, but negotiation is a double-edged sword. Yes, you can probably close some of these critical, better talent, but you're doing that at a stage where often you have no data on that person, right? If I'm making an offer to someone, they have a great pedigree. I have great reviews.

Everything about them is just a shining star of what I want to have in my company. That doesn't necessarily mean that they're going to come to my company and be able to do that. It's a different context. It's a different team. It's a different project. And so you're really taking a risk with that negotiation.

If. Comp them very highly because they look like they'll be worth that amount. And then they don't perform. That puts you in the spot, usually of having to let them go or figure out if they're just meeting expectations, they're not rocking it. You don't wanna get rid of them. How do you then work that out with the rest of the team?

Do you increase everyone? Else's comp, do you talk to this person and down level them? It's not a good place to be. So when I think about negotiations, I really lean into one set down your philosophy a little bit, and to be fairly open about that with the candidate. When we started with Pequity, I did have people like, oh, you had this advantage, cause you've been doing comp for a while.

And yes, maybe so, but no negotiation is easy and going into every conversation, I would tell people, especially early days, one, we didn't have titles. I really encourage people despite having a leveling structure. Don't try to put titles out there too soon. They do tie to comp. People do think of them as money.

It is a very difficult conversation when you get to 50 employees and you're 10 heads of that you had at 20 employees are no longer really relevant for that title. And two, just let them know where you're at financially, it's a little bit weird, but to say, Hey, we're early, this is what we can offer. I'm looking across the team and what I am able to give you today.

And this is what I think the equity will be worth. This is how the cash will workout. That's still a negotiation in a way, but you don't have to do these wild swings where one person at your company is paid 50 K and the other one's paid 200. That's where you get in trouble. And the way that you'll eventually evolve into this.

And if you feel ready to do this at an early stage, I highly encourage it is by creating ranges or bands or, you know, whatever people like to call these. But the concept is that you have this 50th percentile and then you want to build a. Top and bottom to it. So if I want to go and talk to someone, I will say, Hey, I'm targeting this amount for both salary and equity and there'll be a range to it.

And then I'll try to get them to agree to be somewhere within the range for both salary and equity, based on what their interests are. Are you interested in more cash, more stock? What are your primary drivers? Those are the ways that you can then ensure everyone is in band. And that's what most companies do.

I just want all of my employees in a level region and type of role to sit within the same range as each other. And they can then have, from that point there a little bit of negotiation for me to capture them. It's a win-win hopefully, and as I measure this person for performance, I can then validate everyone within that range to make sure they catch up to each other over time.

So if you can get the range very early, I do say that negotiations are necessary. I especially think for early companies and employees, you're going to have to these people, if. I'm thinking a sub 10 person company going for someone who's coming from a much larger organization. There's no way that you're going to meet all of their demands.

They're probably walking away from a lot of cash. A lot of security, you will have to bend in some regards, but this range methodology will help you stay within a best philosophy. There's other things that you also can negotiate on that aren't comp related. And I'm sure you've probably seen tons of these, but things like the early exercise option, what is their vesting schedule?

Their exercise window. I have seen with some teams how they'll have for leaders that they can start vesting after six months and not a year. The mentality and philosophy being, Hey, you're going to contribute so much to the company. We're going to have so much riding on you that I want you to be able to receive this benefit earlier.

Early exercise is another benefit that makes people feel more assured that they'll actually see value or benefit from this. Many little opportunities in just the terms of that contract that you set up with them that can help you avoid this painful reality of overpaying or having employees who are actually doing the same work being paid drastically disparately from one another.

 I was just about to ask you about some of these other dimensions, like exercise window, early exercise, those type of things. Can you share a little bit more when you think about maybe those few different dimensions, pros, cons, what you're seeing in the market, maybe how you've thought about those types of things?

 Yeah, I'm always surprised. I like to say that I think I figured comp out and then someone does something new each time. There's a lot of really creative ways to approach compensation, especially around. There's a couple of options for companies, right? Like we're heading down this road of hopefully you're shooting for the billion dollar valuation.

If you have raised venture capital and you are looking along the way of all these possible ways to receive that could be these acquisition moments. It could be M&A, it could be through IPOing or whatever it might be. And these decisions around your equity are going to impact the leadership most typically of those outcomes.

Right? If I'm going to go into an acquisition scenario and I get this question a lot with very early excited founders or people who are setting up the comp programs, who are like, oh, I want to do something like a single trigger for employees, which if anyone's familiar with that, it's just. A liquidity event occurs.

So that could usually most typically be a purchase and there's a single or double trigger. And the single trigger, usually it's just, you have to have one event happen, which is just the sale. And then there's a liquidation. It's maybe a hundred percent of that person's stock liquidates on that trigger or 50% or 25 of the remaining, whatever it is, they get this immediate one fall double trigger is usually an acquisition happens.

And then there's this other trigger that has to occur to trigger this liquidity event. So that could be, that were acquired and they determined that we have two sales leaders. We don't need both of them on the team. So we are going to let go of the acquiring company sales leader. So they'll get a windfall as a benefit to them.

There could be a trigger that they'll be layered in the org, and there's a significant title adjustment. And that then triggers this event. I hope I'm speaking accurately for the VCs out there, but, and also the acquirers single triggers are not looked upon very fondly or friendly. They usually cause issues with those discussions down the road.

It's very rare to get them into a contract, I would say, but you'll have people ask for it and founders should just know to say no double trigger is much more standard. And I would even say that double trigger for your leadership team is almost expected. I don't see any contracts out there now that don't have it mainly because there's this reality where we all love our teams.

We think they're fantastic. But if that acquiring situation were to occur, it might make sense not to have those people be the ones going forward with that new company, because they might already have a much more established team. Your leaders might not take to the idea of being layered. So you want to have some securities in there.

And similarly with vesting schedules in the market, there have been a ton of shifts in the way that equity is vesting. Now, I had an interesting conversation recently with a colleague who's also a compensation director at a major startup, and we were discussing the fact that equity used to be viewed as a retirement vehicle.

It was never meant back in the day to be seen as, oh, this is part of my annual compensation, but then when Google and Facebook, Amazon apple, all these major companies came in and started to issue equity. They started to view it as part of an angle package for their employees. Amazon is notorious for this.

They used to, I know they lift the cap this year, but they were capping their leaders at 160 K in cash. And the remainder of their total comp came from equity compensation, which is a very stark view on equity as this is what you take home. And what that means is equity for the past decade has been going upwards.

Most individuals are relying on that cash to keep growing and to keep getting more money each year from the equity value. However, as we've been seeing just from the start of this year, equity does have volatility. It can go down. And a lot of companies who are especially public, it's very difficult to right-size that when you have four year grants and when you have these vesting windows that are on a one-year cliff.

And so to make people whole or right, the way that they do so is with shorting vesting periods and also removal of their cliffs that they traditionally had. And this is a. Pretty prevalent thing that we are now seeing across the market. I would say the still with the very early stage companies, four years is a standard, but they are competing more and more against these companies like Lyft, Stripe, Google, and I think Facebook as well, and a bunch of these other big ones who really, really pull talent, where they don't have a one-year cliff or such as in Lyft's case, they've moved to one-year grants.

And the reason that they are doing that is for this competitive rationale of, okay. If anyone at the company gets upset because the equity value has gone down this year and I need to right-size them the easiest way for me to do that. Isn't by committing a four year grant to them is through this annual grant they offer.

And for smaller companies that puts you in this unique window of you might have to compete against shorter cliffs. Liquid value in year one, but it also gives you a really cool opportunity to argue that you offer for your upside, that you'll get this tiny grant now. And if they stick with you for four years, Facebook, Google, LinkedIn, all these major companies, their stocks do go up, but they're not going to go up 10 X, like a small companies stock very potentially could.

And that differential of argument is kind of how you can use these besting schedules and equity considerations to turn the tides in your favor. When you're trying to pull these huge whales into your company to help build it. 

 One of the things we haven't talked that much about is when you're a small company, call it your five people, $20 million valuation or something directionally like that.

How do you think about communicating the value of the equity that someone is getting? And I also think it's been really interesting. I'm always fascinated by the fact that high valuations tend to be compelling for new employees. And a lot of people want to raise at a billion dollar valuation because it actually helps in recruiting and talking to lots and lots of CEOs.

They actually see it helps, which is just bizarre to me, particularly in what we've seen over the past four or five months, when you see this tremendous multiple compression. And so you have a lot of billion or multi-billion dollar valuations that wouldn't trade anywhere near that. And so you can easily be underwater as an employee, but I'm curious specifically at the earliest stages, how do you think about communicating the value of what they're getting?

And maybe they're thinking about this offer against three or four others. It's 

 absolutely different how you would think about it from small to late stage and the way that. It differs, of course, is when people first create their pools in case anyone doesn't know this, your stock will be like pennies. I think when we exercised our, we stock, we first incorporated.

It's just me and Warren as co-founders we paid like 200 bucks for all Pequity the stock in the company, you know, it was very tiny. And then as you keep growing, of course, that stock value goes up, but it's not going to be the, you know, hundreds of dollars that you think it'll be, it's going to be like 75 cents today.

And tomorrow it's like $3. And when you go to a candidate and you're like, Hey, I'm giving you like 1% of the company it's worth 300 bucks. They're like, this is insanity. Why would I join that? So the way that we get around that is accurate to communicate. You have to look to the market that you're competing in often and find other comparables.

A great example of this. When I was at cruise, we were in the autonomous vehicle space and we didn't list any value on any grants that were given. One wasn't very incentivizing to see this tiny dollar amount tied to each unit. And two, we didn't want to reveal too much to the public. There's this whole fear there's Uber and neuro and Waymo was all in the space.

So no one wanted to show exactly what these values were. And so the way that we would look at it is way more actually had a ton of very public valuations. Tesla, of course, the too. And we'd say, Hey, look at these valuations, this is where they're sitting at. Imagine if you owned like X percent of this company and what that would mean for you, and you kind of encourage people to believe in this dream, because that is honestly what you're shooting towards too.

You want them to think, oh, I want to have the same crazy valuation as a Waymo or a Tesla or these like Uber huge companies. And people are like, oh, I feel like I'm like deceiving them, but your company is young. It is the promise of tomorrow that should be selling people. Cause you're building towards that tomorrow.

So when I talk with people, I really anchor around, again, going back to that pay philosophy. I say to people coming to Pequity, we have a pay philosophy. It's X. This is how I think about it. I make sure to balance across my employees. So this is what we'll be doing. And this is the stock that we have today.

I try to be very transparent with our employees. I actually do show them the strike and the preferred mainly because we do use our own tool. So I'm like, you're going to see it anyway. So let's talk about it. And then we show them on usually a calculator, which Pequity we've built in our tool, but you can show this is where we're at today.

And if you assume this crazy multiple that we think we realistically can get to based on these other comparables in the market, look at how much money that is. Look at how much value we're going to be offering you. And that's the dream that you sell on. And most. Have they been in the space that they get it, you'll obviously experience people who maybe didn't grow up in this arena or they're really cash sensitive is why I say they want more cash and it doesn't matter as much to them.

 Do you communicate dilution in a certain way? Or how do you factor that in when you're trying to communicate what this could be worth and is there nuance to the way that you deliver it, such that outlier successes, outlier and rare, and so that doesn't come back to. 

We try to include our calculator. Of course, I always warn people and our calculator does have a very thick, legal statement. I always tell people, make sure you have that in there about how it's hypothetical. We can't predict the future. This is just us trying to provide you with a scenario tool with the tool that we've built that is available to our customers, the candidate actually themselves manipulates it so they can change it up and down and see what it does, which is great.

Cause you don't want to. The worst case scenario, I think is where you're like, we're going to be 10 X, multiple, and here's what it looks like. And we're so confident that we're going to get here. It's almost a guarantee like that kind of language definitely want to avoid the best world that you can do is give them all the information and say, Hey, we think that there'll be on.

10 to 15% dilution per round. Assuming we go through all of these rounds to get to this point, here's what it might look like. Here's the valuation jumps that we could have at each point. And so this is the process and steps that we will take to help guarantee that that I think is more reassuring than anything.

Cause usually when someone's coming in, I think I saw once that stress can lower your IQ by like six points or something crazy. So I always try to think about that when they come in and people like, why don't they get it? Like, why aren't they understand what I'm saying to them? It's stressful to negotiate for a new job.

It's stressful to come to a startup where you don't totally understand the equity. You don't live and breathe it every single day. A lot of times you see your paycheck maybe once every other week, if you're really diligent, but most people I'd say are not looking at it that often, especially not looking at their equity grants.

So just giving them the tool to do the calculations themselves and figure out the scenario planning, I think is key and answering for the longterm of, Hey, like if this is stressing you out, just to reassure you. We're going to have refreshes, we're going to have performance management steps so that we can make sure if you're performing strongly there's comp associated with that.

And there's all this opportunity and look at the market, look at all the comparables that we're going up against. But I think when people are worried about dilution, it's deeper, of course there's dilution. And they usually know that it's a concern of, am I going to be kept whole, is this employer going to take care of me in the future events of fundraise or liquidity events?

And you just want to reassure those fears. 

 Are there any other hacks or pro tips or created interesting things that you've seen or you've done at the earliest stages that might be useful for folks that are listening? 

 Yeah, don't be afraid to hire people as contractors to start a couple of our very senior hires.

We actually started as contract just 20 hours a week. It was coming from this world of when people. Coming from a large company and they have all that security in place coming to a tiny startup where it's like, oh my gosh, like they're gonna pay me less cash. I'm going to get this equity that looks like it's not worth that much today.

And they're promising it's gonna be something tomorrow. But how do I know? How do I know if this team is even good? I haven't seen them perform together. Well, I often will tell people is I get it. I completely agreed. This is probably the most insane thing for you to do so rather than make you dive all in, why don't we take a baby step?

I can still get benefit from you and your expertise. If you start as a contractor, let's try it out for X number of days or months. And then at the end of it, let's talk about if this should be a full-time relationship. And I think that that gives twofold things. One, you get help immediately when you're a small startup, you are dying to get people to help you and to.

It gives them a chance to build the relationships and to also build the picture themselves of the value of what things could be. Even if you sit on multiple phone calls, explaining your philosophy, your mission, vision values, it's not the same as being in the day-to-day with the team, seeing the interactions, seeing how customers are reacting, seeing the problems that you face.

And I think if you can be open to that and have a lot of NDAs and contracts in place, it's a very powerful way to get over. Some of these fears. This contractor avenue can be a solid way where when people lean into comp, I say, you know what? I'm not sure we can go to that. So why don't we test each other out?

You start, you help me. I'll see how you perform. You can see how I perform, and then we'll revisit this conversation. And it just makes it much easier at the end of the day, because it builds the trust that you need to have a really good compensation negotiation conversation. 

Photo of Kaitlyn Knopp against a blue background with a cloud

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Kaitlyn Knopp, founder & CEO of Pequity, shares tactical compensation advice for every startup stage — from initial leveling and comp philosophy, to negotiating offers, extending exercise windows, and handling bonuses and inflation adjustments. 

How to get comp right — Kaitlyn Knopp’s advice from Pequity, Instacart, Cruise & Google

Tactical advice for every comp challenge, from leveling and philosophy, to negotiating offers, explaining equity, and handling bonuses.