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Startup Pay is like Guerilla Warfare

Stickman-guerilla warfare-20211104It has been proven time and time again that a persistent and committed band of fighters can hold off and even beat the largest and most powerful armies in the world. This is never accomplished by fighting with the same tactics. It works exactly because the tactics and passion for survival are far different than that of the larger and better-funded force.

Wikipedia puts it this way:

Guerrilla warfare is a form of irregular warfare in which small groups of combatants, such as paramilitary personnel, armed civilians, or irregulars, use military tactics including ambushessabotageraidspetty warfarehit-and-run tactics, and mobility, to fight a larger and less-mobile traditional military."

Most human resources and compensation professionals are peaceful people, but we are all fighting in the war for talent. It often surprises me how many startups choose to fight that war using the same tools and techniques as their larger combatants. There are, of course, rules that generally must be followed, but they are few and fairly unrestrictive. When you are battling for the existence and success of the company that aligns with your passions and puts food on the table, perhaps you should consider not following the leaders.

More companies should look at the major trends and core market data as examples of what NOT to do. This is the history of startup success. This is the core of rewards elements like 401k, stock options, and great food at work. Each of these things was initially used to provide a competitive advantage for scrappy startups versus large established corporations.

In compensation, we tend to start with market pricing, but it may make more sense to start with establishing the ideal pay mix. Base pay at the 50th percentile assumes that base pay should play the same role at every company. Short-term incentives that are scaled to match market data ensure that you will be competing against companies with larger budgets using the same tools as they use. That seems counterproductive, and kind of dumb. Granting equity compensation with a 4-year vesting period because it is a “best practice” is kind of like American Revolutionaries choosing to wear bright red costs because the British Army wore them first.

When we start with pay mix, we rearrange how we view our budgets and path to success. For more than 15 years companies have been locked into this idea that startups can only use 20% of fully diluted outstanding shares as their maximum equity pool. This isn’t a rule, it’s a guideline. Smart investors can be educated to understand that giving up a bit more capital now, to win later, makes more sense than hoarding shares and losing.

While cash is limited at startups, annual incentives can still exist and are compelling. I have helped many companies roll out annual programs where the delivery mechanism is something other than cash.

Food was a great differentiator when everyone worked together in a cool shared office location. In a remote, or work from home, environment, we need to imaginatively consider other options. Discounted delivery? Schwann’s truck deliveries? A StarTrek-like “replicator” in every home? Think about what the big companies wouldn’t do and then try and do it!

The goal of every startup is to eventually grow out of being a startup. You don’t need to be Amazon, Google, Apple, or Netflix today, you need to be who they were when they too fought using unexpected and often “unfair” tactics to support their growth. It is a war for talent and your ability to win starts with your ability to fight differently.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”“Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.