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

Kaitlyn Knopp: 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.

Brett Berson: 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 

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

Brett Berson: 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?

Kaitlyn Knopp: 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. 

Brett Berson: 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?

Kaitlyn Knopp: 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. 

Brett Berson: 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 

Kaitlyn Knopp: in the market.

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.

Brett Berson: 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?

Kaitlyn Knopp: 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. 

Brett Berson: 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 

Kaitlyn Knopp: 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.

So you do have to negotiate. 

Brett Berson: 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. 

Kaitlyn Knopp: Yep. We do talk about dilution.

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. 

Brett Berson: 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? 

Kaitlyn Knopp: 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. 

Brett Berson: And when you do that, does it tend to be people that are in between things or it's nights and weekends?

I think the number one pushback is always like quote, the best people aren't available to do contract, to hire kind of 

Kaitlyn Knopp: a thing. I think that might've been true pre pandemic. I think it's less true. Now, some of our individuals who start as contractors were between things, but actually, I mean, all of our first hires who are now our full-time employees, they were contractors.

And it was mainly because equity bootstrap for the first year, we could not afford to pay engineers, their full salaries all the time. And so we issued equity and I said, Hey, let's make you a contractor. I can't afford this full rate that you want. So why don't we do X number of days a week and X number of hours.

And when we were early, it made sense that like we had this, like trade-off between our front end and backend engineers and different time zones. So it just, it kind of worked out. One was full-time with us, the other. I know doing other gigs, we actually still have one engineer who does other opportunities.

He's only with us three days a week. I think the world has shifted drastically because it used to be, you had to go into an office, you had to be visible in front of people. There's no way that you could juggle two things at once, but we have found more and more that people do want the option. And notably, I just saw an article recently that Canva actually, which is a very large company hires multinationally.

They offer the option with some of their offers to employees where you can be full-time or contract. It is up to you. I'm very curious to see how that kind of trend continues because I think. One it'll drastically change, the role of compensation and employment and talent. But I also think is very powerful because it gives control to the employee to say, Hey, you get to make a choice.

Do you want to be full-time with us? Do you want to maybe Moonlight a couple of gigs and figure out what's best for you? I know there's of course, arguments on, oh, are they fully committed or they give you their all? We haven't run into the issue. I've seen it being a very valid option for very senior people who are already at companies who just want to do, I would say up to 10 hours a week and you can still get a lot of value from the 10X-er working 10 hours a week for you can give you a.

Brett Berson: One thing you hinted on a little bit, but we didn't yet talk about, and maybe we'll explore this and then talk about some of the considerations as you start to scale as a company, how do you think about or approach refreshes? And I kind of put that outside of the topic of somebody grows in their career at your company, you kind of outlined either you have a simple rubric, a more sophisticated rubric or a leveling system, but you also have folks that are in a given level.

And they've been there a certain amount of time, maybe four years. And it's always this tricky question of what to do about re-upping or giving them additional equity. And I'm curious what you've found or how you approach. 

Kaitlyn Knopp: Again, as with everything in comp there's no silver bullet, but the most common way that we do see is that you give someone 25% of their new hire target.

So whatever you'd issue, a new hire in that role, and you let it vest over four years, that tactic creates some issues that most individuals in the bay area aware of, including the dreaded five-year cliff, which is as these grants stack up your new hire grant is always your largest grant typically. And that stops vesting in your four under traditional program.

So in year five, then we have this huge drop-off and it becomes a year where you either let people naturally attrit out of the org because it's a big pay cut, or you have to do something to right-size that person. So that's the most common that I see. However, as I mentioned a little bit earlier, there is this.

New trend of viewing equity as a primary compensation vehicle, less as a potential windfall retirement plan. And so I have seen more companies and surprisingly large companies move to some of these dynamic refresh schedules. And what I mean by that is they'll actually look at these employees and say, okay, if the target is 200 K for value, and as they're vesting this year, the stock dips a little.

So they're down to one 50. I want to issue a grant to vest next year to give them 50 K in value. And then maybe they get to next year, the stock went ups and they're investing two 50 that year. And they're going to vest 220 the following year, but then it drops because there's fewer options vesting in year three, they dropped back below 200 they'll issue a grant to vest in year three to make it right sized.

So it's, it's very interesting and very intricate. I do see that, like I said, at some very large companies, I think it's because their stock price is a bit more controllable, a little less volatile than a startup, but the purpose of a refresh, if we're backing into it from a small company perspective, is I want to keep my employees whole, I want to issue to the employees.

Equity at an earlier state that as it vests, they can accrue value as our company gains value. Right? So it's twofold this like, okay, there's a market rate. I need to be paying people to keep them interested, but also I want to keep them hooked for a longer period of time. So I need to make sure it's significant investing in such a way that they can accrue that value.

And of course, just the general retention of having a grant that's vesting X number of times in the future, it's a little hook to keep people in. And so when I look at refresh programs, we do refresh at Pequity. I like to encourage a small companies that you don't have to think. You have to have a program on day one.

It will be ad hoc. You're going to look out across your employees. And I recommend doing ad hoc once a year. So at least. More consistent, but you'll probably look at your employees and say, oh, you know what? The first 10, we were so confident in the level. Now we're less confidence. We have to look at what their stock is like, what should they vest?

What do you want to give people by year two, if you're 20 to 30 employees, you can get more consistent and say, we'll refresh people on their one year anniversary. That is the most common tactic because of that one-year cliff. And when you're doing all of this activity, the most important part of a refresh is explaining it.

Anything with compensation, unfortunately is an education problem. Usually you have to make sure that your employees understand how they're paid, why they're paid, what they're paid, and if you're paying different groups differently, you have to figure a way to communicate that. I have teams that pay engineers, the 90th percentile and the rest of the team, the 50th, and it's.

They're worried about someone poaching their engineers. They want to pay them more and they need to attract this great talent, but that can be a weird conversation to have. And it's no different with the refresh rate. Like when we're talking with employees about why we're refreshing them, it's very easy for the employee to be like, oh great.

I got another grant. Was that mean? You have to impress on them. The value that we really believe in you. I think of equity as an investment in the potential of the employee is this mutual investment, right? I'm investing in you employee because this stock is going to vest over the next X number of years.

And I believe so strongly in you that I want you to be on this journey. And similarly for the employee, the idea is that they will get this stock. And if they perform well, that stock could be worth 10 X. It could be some huge windfall for them. We can all be sipping Mai Tai's on the beach. It'd be great, but you have to let them know. When I often sit down and talk right now.

We're small enough where I've met with mostly employees about their grants. And I explained things to them, but I tell them this. My way of encouraging you to do what's right for the business, because you now are partial owner and the refresh that we issue each time. It's another opportunity for me to reinforce that.

And if there's anyone out there who's like, oh, like, you know, it's so cheesy to say, this person is a potential owner, yada, yada, that's one, the wrong attitude. But two, you're probably not looking at this the right way. Like your first couple of employees, they're gonna need to get layered at the end of the day, your first 10 employees are not likely the same employees.

He'll be at the top of your company when you're 150 employees or a thousand. So that means that these people need to have some benefit to them that justifies a painful move, because if you have to bring in someone to help the business move forward, that is really going to be a painful for that person.

And equity is a great way to explain it. And I've had that conversation already with employees where I've said, Hey, you killed it. You got us to where we are today. We gave you that equity grant, because that is what we believed in from you. And I want you to keep that in mind, as I talk with you about the fact that we have to bring in someone else, we need to go to this next stage.

It's not that we don't think that you wouldn't be able to get there eventually. It's just that we need to get there really fast. It's what's best for that equity. I gave you to make it worth that value that I've promised you. So hopefully that's encouragement for people to think about it a little differently, because I think that refresh with many comp programs, you'll see this, it just becomes another like check mark.

It's like, oh yep. Checklist. I did it, but you need to enforce why we're doing it. Or else you lose all this residual value that comes from doing it in the first place. 

Brett Berson: I think one of the most common things that you see as it relates to refreshes, let's see you hire a product manager they're on a four year vest and they get to year four, they're fully vested.

And then they kind of have this very logical thought, which is. If I go get another job, I'm going to go get a new slice of equity. That's going to restart vesting. And if I leave, you're going to go hire a product manager in my role and give them equity. And so any thoughts about how this translates to kind of that more four year someone's fully vested?

Is there a formulaic way to think about this or some sort of system that makes it a little bit easier to figure out what's the right thing to do? 

Kaitlyn Knopp: Yeah, so it depends what you're trying to solve. Right? And that world, I have someone who's a four-year grant year five. There's no grant, right? Like that grant went away.

One way that people solve it is with what we call a boxcar grant, where I append twenty-five percent of that four year grants, like one year investing to year five. And so that person is maintained whole. That is one way to do it. There's companies who issue box cars after every, your second year anniversary, basically.

So you get to your second year, we give you a grant, invest in year five. Great, but there's still this question of course of does that person actually value it, when there's performance considerations. So what could happen is that someone gets promoted and we give them a promo grant, but because their previous boxcar grants were granted at their old level, they're not as high.

So you have to figure out how to right size. But typically I would say boxcar is considered the gold standard for how to maintain this very consistent program, but you will need to work on in that product manager world or this person at year four is looking out. And even if they do have a box car, the market's always moving.

Right. I could have been doing these box cars every single year. They have eight years of vesting in front of them and they get to year four and they're like, huh? You know what? If I went to another company, the market's changed so much for my role. I could get 30% more, even though this company is keeping me whole.

And that's where you have to think about your refreshes from a performance standpoint, you do sometimes have to. One off grants. Every company, I would say has some semblance of a spot equity grant. They have under different terms. It's usually reserved only for the top performing employees at the company that you really want to retain.

But that's one way that you can look at it. The other way is that if you are going to be doing refresh with a boxcar model, you could layer this performance refresh on top, where you would do some, maybe it's also 25%, 25% is considered the standard by the way, for four year grants to issue your refresh.

But maybe you take that 25% and you apply a multiple to it. You know, if this person out of a typical five rating scale, if they are one above the mean, so let's say exceeds expectations, I'm going to give them 20% extra on top of that target. And then that can vest over four years going forward, but you will end up in a world where it's very complex.

You still have to explain all that to your employees. And I don't think that there ever will be a perfect world where you will be perfectly equipped to respond to every swing in the market. Unless you move to a model like Lyft, which is doing one year grants. I believe Coinbase might be doing this too, because the only way that I can, as my stock is changing up and down, make sure that you are truly whole at your market rate is to issue these shorter vesting grants to you.

So if the stock does go down $5 tomorrow, I can issue a short grant to make it up. If it goes up 10 bucks the next day, I don't issue you more equity to help take care of it. And it's more of this nimble model I think could evolve out of refreshes. As we've been seeing over the past year, everyone moving to the one-year grants and their new no one-year cliff means that all their refresh schedules also had to update.

So. The short answer is that for the current period, if you have a four-year program box car granting is a very common way to solve for that cliff, but longer term. I think we'll probably see more of these shorter term refreshes and grants occur to help balance out for those cliffs and occurrences of market movement.

Brett Berson: Are there other things to keep in mind, as it relates to compensation and educating an employee base about your overall compensation? I find that very few people are actually pleased with their compensation. Like even if you're doing it quote correctly, or it's unbiased, it's fair. Most people think that they should be compensated.

And if they heard that someone else has more compensation in a similar role, They can't possibly grok that that is merit based. So the vast majority of people in your company, probably not being thrilled with compensation, they have a friend that works at another company that has this crazy thing. And, and so I'm curious because of that, are there other things that companies can be doing little techniques or maybe more broad things to keep in mind to manage that reality?

Kaitlyn Knopp: So a funny story, a very large company that is on my resume, did a covalent study of our employees. And we hired, I think it was PWC to run this. And we said, Hey employees on a pretax and post-tax basis, what are you paying? And when our results came back, and by the way, these employees had pay stubs, they had tools that we had built.

We had all these educations for them. And so you would think that they'd be able to very easily look up just what is your pretax versus post-tax pay? And 90% came back inaccurate. It was very shocking. Only 10% of the entire population got their comp. Correct. And it was incredibly eye-opening because it wasn't like there's people who thought they were drastically overpaid.

It's not even just people think they're underpaid. It's like people who assume they're gonna get a lot more money. And we're like, oh God, like we should probably correct that, because that's not happening. And then people. Underestimated everything. And we're like, oh, I think I'm paid nothing. Or like, what are they doing?

Like they don't see what's happening. And this was a, again, a large company well-funded it had a lot of resources. That's probably true everywhere. I think that it's very difficult for people to understand their comp fully, especially when it comes to equity. Equity is really unique to tech. It's been spreading more, but even tech in Canada before the pandemic equity was not really too typical.

It happened. I have been hiring in Canada for a while for a lot of companies and yes, we issued grants, but they're usually a quarter of what they were in San Francisco. And sometimes you had to like force the candidate taking like, no, like this is going to be worth something like, yeah. If I really don't know what it's going to do so I don't know if I want it.

And that education barrier is really gonna block you up as a small company. I think it is a bit more of. Transparency, not in like, oh, we're sharing everyone's comp people. When they hear the term comp transparency, they're like, oh my God, they're going to publish all their ranges and all their employees pay.

And that is a very extreme end of a very wide spectrum. There is a world of transparency that you can start with of just publishing your philosophy. And there's some companies who have done this masterfully. If you're a small company, I highly recommend looking up buffer. They have published their compensation, philosophies, their frameworks, why and how they do what I love it.

It's great for small stage get lab was another one that published a calculator. I think they've hidden it now, but you can still see some of their philosophies, but that is a great place to start of just a first step on transparency. I'm just letting you know. As an employer, this is how we think of things.

This is how we negotiate. This is what we do for performance. And when I was at Google, we actually would publish quote, unquote, the formulas, where we would say, Hey, you know, we have an individual multiplier and it's tied to your rating and here's the multiplier per rating. And you have a target and we multiply your target by the individual multiplier that goes to your rating.

And so that's how we get to your increase. We never actually listed the target. We never told them what their amount would be, but it let them have some certainty that we had a formula that we were falling and it would happen at the end of the day. And again, it's going to be a slog, just getting this education through.

I always stress to people to remember that your. Are just relying on you to take care of them. They're not looking at their paychecks, very diligently. There's very few employees who do frequent checkups. And that means that they aren't educating themselves very frequently on it either. So you have to find the snippets to get out to them.

And that does include equity education. It's double-edged sword. I'm sure there's some legal people out there who are like immediately muting me. Cause they're like, oh my gosh, don't listen to her. I don't want you talking to your employees about these equity terms, but you need to, you have to find a way to work.

If you have a legal person who's stressed about it, find a way to communicate what you have to get people to, where they need to go. You don't have to offer financial advice, but people do need to know what it even, we were talking about exercising options. There are people who are like, what does that mean?

What does it mean to exercise my options? And they assume so I've had a shockingly large number of very senior, very intelligent people assume that exercising options was just clicking a button. They didn't know they had to pay at times for these options. That's triggering. That's like, oh my gosh, I have to pay for this.

Like, oh my goodness. Like, what if I can't afford it? And that's where you get into these holes. So you need to prepare these people to say, Hey, when we say you'll get early exercise, this is what it means. You'll have to pay so much to get this, and then you'll get this benefit in return. And that's your intended value, right.

And you have to educate them on, okay, there's equity. And I have to let it best. There is long and short term capital gains of public companies. Especially. I remember that being such a friction point with some employees where they didn't understand why they're getting taxed more and Google did a lot to take care of their employees and educate them.

And it was always the explanation of you have to let. Rest for a year. And then you avoid these huge taxes. And back when Microsoft acquired LinkedIn, there was a force cash payout for a lot of employees. And what some employees didn't realize is that if you reinvested that stock, you had like a certain window.

I think it was like 30 to 90 days. But if you reinvested the cash windfall that you got from that force payout, you would avoid taxes on it. And because people didn't know that they're like, oh, I just got this great windfall and then come tax season they had tens of thousands of dollars to pay in taxes, which is a shock to have to pay.

And those are the points that you need to educate because. As an employer, no, you're not responsible for everyone's personal individual situation, but those are very meaningful moments where if that windfall happens and they have to pay 10 K in taxes and you didn't give them any sort of education or access to an education for themselves, they're going to blame you.

And it's kind of, it's not going to look good, right? Like they're going to think, oh, they hid this from me. They don't care about me. So this education really layers deep into your culture. You have to think about what it means to be transparent. I really do encourage starting with just our philosophy, being public and having some formulas, being public and leaning into it.

Don't make it just something that you've published and talk about when you hire someone, revisit it once a year, remind people, if you want to put it. When we have performance reviews or comp reviews, you kind of send them a link and say, Hey, it's a reminder. This is our comp philosophy. Train your managers, train your recruiters.

It is a village effort, but if you can nail that. You'll have a much happier team and group and they will feel taken care of this 

Brett Berson: whole topic gets at this idea that I think is a little bit underexplored, which is just our own human, cognitive biases and how it applies to comp. I wonder why it's not these types of traps.

Aren't thought about as much as I think they should. They come in a variety of flavors. This sits outside of what is market for a role, but it's things like you give someone a raise and then their set point moves. And so they get a week of delight or a day of. And then now their set point is reset. It makes me think that one strategy that I don't think most companies employ would be actually giving people smaller initial grants and then much more aggressively either in performance or refresh, upping them.

So people feel like they're getting more and more versus the cognitive thing of, well, I already got this 50 basis points and I haven't gotten anything else for four years. And the way that, that demotivates people, the other area that I've always been fascinated is bonuses, bonuses, particularly outside of sales commission, I think are a really fascinating thing in that, particularly if there's squishy things around performance, but what you tend to see is let's say there's a pre-set bonus.

You make 100K there's a 20 K bonus. I've always found that the person at the beginning of the year, Ends up psychologically assuming that their comp is actually 120 K. And so what winds up happening is they do a great job and they get their bonus. They get no dopamine hit, but if they do an okay job and they don't get their bonus, they're like hugely de-motivated because we hate losing things.

And so I always found that that's interesting and maybe kind of underappreciated. I heard a story. I don't know if it's true. I think it was Larry Ellison or maybe it was Marc Benioff in the very, very early days of Salesforce that they would give each sales person a Corvette or something like that at the beginning of the year.

And if you didn't perform and hit your quota, you would have the Corvette taken away from you because we always hate having things taken away more than we do getting them. And maybe this is kind of a lazy way of thinking about it. That's why I tend to think that things like surprise and delight that aligned performance with equity are potentially more valued by the average employee than some preset.

At the end of the year, you get X, or if you do Z, you get Y and those types of. 

Kaitlyn Knopp: No, it's a very good point. And early stage companies, I always say, don't do a bonus. It is a trap. You'll have to pay out the full bonus just to your point. Feel like, ah, okay. Yeah, I got what I expected and you'll have to overfund them to make them feel excited and not all of them are going to deserve it.

And if you happen, like you said, to have under-performers, if you don't pay them the bonus, they're going to leave. And maybe they're not that bad of a performance, just they don't deserve the bonus. Like it's a disaster. They'd be much happier if you just put it into their base salary. I think sales bonuses have the best tie, of course, where it's like, for this many dollars, you earn, you get this other dollar back 

Brett Berson: because those inputs and outputs are clearly tied together.

Exactly. So I thought we could wrap up with a series of rapid fire questions where I'll kind of throw out a topic and maybe you could answer it. And whatever comes to mind as it relates to compensation. The first one is how do you advise founders or people leaders think about the current inflationary environment and what that means to annual salary adjustment.

Kaitlyn Knopp: I would think of it as this is also a trend, meaning there's a trend line. We're not sure if that trend line will continue. So there's a likelihood that you'll have to do some short term balancing. We see a lot of companies doing that with spot bonuses, but it's much harder to reverse the trend on salaries.

If you give someone to increase, you're probably not gonna be able to take it away versus short term gaps until we see if this longer trend line will continue. So spot bonuses are the most typical path. Yes, you'll have to issue probably a slightly higher salary wise, but don't feel like you have to go up the full inflationary amount.

How 

Brett Berson: should an early stage founder diagnose whether they have a compensation problem or maybe just a squeaky wheel problem? 

Kaitlyn Knopp: I often say you have to have a health dashboard, this something we built in Pequity to help our companies. You have to see am I getting the accepts that I want from the companies I want to recruit?

Am I losing talent from key teams that I need to keep the company moving forward. And are we hitting our goals as an organization when it comes to talent? So is our sales team hitting our quotas is our engineering team hitting their milestones. If you see that I'm losing talent, I can't get accepts and we're not hitting our goals.

You might have a comp program issue that you should dive into by diagnosing with really good data and someone who can do a really good analysis across your teams. What's the 

Brett Berson: number one mistake you see in early stage. 

Kaitlyn Knopp: Early stage tradeoffs. So negotiations happen when people tell me that they have a trade-off agreement where people can go crazy and I want to have zero cash.

I want to have all equity, or I want to have all cash and no equity. Those really can haunt you. You need to put parameters ranges are the way again, to go with that. The reason why is that you will probably accidentally discriminate against parents in particular or individuals who might have more financial concerns at home, which unfortunately does steer towards certain demographics over others.

So I've been at companies where they had the trade-offs. They were like, oh my gosh. For some reason, all of our new moms are underpaid. And I go and I look and they had a trade off agreement and yes, the mothers in those situation did choose to take less equity and took more cash. Now that company's doing well, and they're 10 X below their peers and that's not great.

And of course you could always say it's the employee's fault, but. At the end of the day, the way to avoid that is to not have trade-offs in the first place or to drastically limit them. If you're going to offer them, 

Brett Berson: what's a radical idea about compensation, maybe that you've observed recently, that you don't know if you really agree with it, but you do find it intriguing.

I 

Kaitlyn Knopp: think the idea of very individualized packages, there's a couple of intriguing ones. I've seen like Netflix actually does a version of this, where they have a market of one philosophy. They don't use ranges. They don't submit to surveys, or at least they didn't. I don't know if they did this year, but as the idea that every human is so unique that our pay pack just can't be compared to others at the company.

I see that as well, trying to balance out individual vesting schedules where it's like, oh, because I started this date and my stock price is this. I need to, as a manager, make sure this person gets seven shares while this person only gets 10 or they get more, I guess, with 10, because they all start on a different date.

These individual programs is what people are asking for like employees. I as the employer, I'm looking at every individual case for them. And I think there's a lot of noble ambition behind it. It's like, it's very lofty of a goal to say, I'm going to make sure that every single individual employee at my company is bespokely taken care of and compensated.

So I want to keep an eye on it. I think that there might be a world where we do go a bit more individual specific, but I also think from a program side of what a mess and a nightmare, it must be to have to pay attention to all every single individual persons situations. So that's a trend I'm seeing lately.

Brett Berson: That's interesting. Cause I think at most companies you have this issue where the top 10% or 1% of people tend to be under compensated for their contributions and the average employee tends to be overcompensated. And so that's an interesting way to think about it. What common comp advice do you hear a lot, but you disagree.

Kaitlyn Knopp: If you have someone who tells you to create your ranges between the 25th percentile, the 50th will be the midpoint and the 75th is the top you're in for disaster. It's just, it is a percentile model. So it's a statistical model. Meaning about my 25th of 75th percentile could be 5k apart or they could be a hundred K apart.

We don't know. And so when I see companies who are like, oh, I was advised to do this, or like I did this to myself. I just know that that means that their employees are going to be all over the map when it comes to comp. And it's probably gonna have a lot of inversions and pay disparities. I have to be corrected.

So to get around that do not do just a low, mid high of all percentiles, choose one percentile, put it as your midpoint, build a percentage range up and down from it. And you basically have the baseline of what a compensation analysts will do when they create ranges for you. And lastly, 

Brett Berson: what are your favorite resources on the topic of comp?

What are the different sources, podcast, places on the internet you had. Well, this 

Kaitlyn Knopp: podcast, for sure. I would say world at work has a great program. Most of the Fang companies send their comp teams to it. If you want some validation, the society of human resource managers is a great place as well. They have certification program.

I really look to what people post online. Like, you'll see some really cool programs come out. And I like to read kind of like what the comp pundits will say. There's a compensation cafe. There's some HR blogs you can join. But looking at like what and why they're doing will tell you way more than just a simple formulaic approach.

Most places don't publish their comp formulas or rationale because it is so bespoke. You can do it in so many ways. I like to emphasize with people that, yes, it's a number. It looks like there should be an algorithm that tells us exactly what everyone should be paid. But 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 100 K cash and everything else is equity. I could do that if I want to. And it could be a very valid comp program and that will end up in the surveys. It'll end up my HRIS.

It's going to end up out there. It doesn't mean that you should be doing that so what, I like to caution people. It's like go and read as many resources as possible. The ones I listed are great because they're all HR professionals and practitioners, 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 wit 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 what 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.

Brett Berson: Awesome place to end. Thanks for, uh, making comp bit more. Interesting, fun and practical. I think you put the fun back in compensation. 

Kaitlyn Knopp: Oh, well, that's what I strive to do. So thank you. Thank you for having me. It was great to get to chat with you.