October 13, 2026
Pay your first employees enough cash to clear the legal minimums and keep them focused, and make up the gap to market with equity. Early hires usually take a salary somewhat below what a larger company would pay in exchange for a meaningful equity grant, and the less cash someone takes, the more equity they should get. Put the equity in the offer letter as a number of shares, subject to board approval.
Key takeaways
A below-market salary still has to clear two floors. First, every employee must earn at least the minimum wage for all hours worked, under federal, state and local law, whichever is highest. Second, an employee you treat as exempt from overtime must be paid a salary at or above the exempt threshold. The federal threshold is $684 a week ($35,568 a year), after a 2024 increase was struck down in court and formally withdrawn in 2026. Several states set it much higher. In 2026, California’s is $1,352 a week ($70,304 a year) and New York City’s is $1,275 a week ($66,300 a year). If you pay less than the threshold, the employee is non-exempt and has to be paid overtime. See Exempt vs Nonexempt Employee.
You can’t make up for a sub-minimum salary with equity, and an employee’s agreement to work for less doesn’t change that. Founders are treated differently. See Workers at My Startup Are Willing to Work for Equity Only. Is That OK? and Startup Founder Salary.
Start with market data for the role and the location, then decide how far below market you can go. Salary benchmarks from equity management and compensation platforms are the most useful source, because they’re based on startups at your stage rather than large public companies. At pre-seed and seed, early hires often accept 10% to 30% below what a larger company would pay. Go much lower and you’ll struggle to hire anyone who can’t afford a pay cut, and you’ll have to fix it with raises once you raise money.
Write your approach down before the first hire: how you set pay, whether pay varies by location, and how you split cash and equity. It keeps offers consistent and makes it easier to answer the inevitable “why does she make more than me?” See What Is a Startup Compensation Philosophy?
In a growing number of places, yes. California, Colorado, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Vermont, Washington and Washington, DC require a good-faith pay range in job postings, usually above a minimum number of employees, and more states are added every year. Some cities, including New York City, have their own rules. The rules often apply to remote roles that could be filled by someone in that state. Keep each offer within the range you posted.
Two rules of thumb are a starting point at pre-seed and seed:
These ranges shrink quickly after a seed round. Grants come from the company’s option pool. At Westaway, first hires typically get restricted stock until the company’s first 409A valuation, then stock options. See Startup Employee Equity and Employee Option Pool.
Say a seed-stage company has 8,000,000 shares outstanding and a 1,000,000-share option pool, so 9,000,000 shares on a fully diluted basis. It hires its first engineer at a salary of $150,000, below what a larger company would pay for the role, plus 1% of the company. The offer letter states the grant as 90,000 shares, not 1%, vesting over four years with a one-year cliff, subject to board approval. If the company hasn’t had a 409A valuation yet, the engineer buys the shares as restricted stock at fair market value and has 30 days to file an 83(b) election. If it has, the engineer gets an option to buy 90,000 shares at the fair market value on the grant date. See Why Use Exact Share Numbers, Not Percentages and Startup Employment Contract Guide.
Keep bonuses out of the body of the offer letter and put them in a short written bonus letter or plan. It should state the metric, the measurement period, when the bonus is paid, and whether the employee has to be employed on the payment date to receive it. Say whether the bonus is discretionary or earned on hitting the target, because state law treats them differently. In some states, including California, a bonus that has been earned is treated as wages and has to be paid even if the employee leaves before the payment date. California also requires commission plans to be in writing and signed. A bonus tied to milestones can supplement salary, but it can’t replace the minimum wage or the exempt salary.
For more, see Startup Compensation: Mistakes to Avoid and Employee Onboarding for Startups. If you’d like help with offer letters and equity grants for your first hires, see our Employment Agreement service or contact us.
