October 13, 2026
The compensation mistakes that cost startups real money are legal ones, not strategic ones. Promising equity as a percentage, granting options without a plan or a 409A, letting people defer salary, calling everyone exempt, and skipping required pay ranges can all lead to claims or stall a financing in diligence. Fix those first. A compensation philosophy and pay bands come second.
Key takeaways
A percentage changes every time the company issues shares, and nobody agrees on what it was a percentage of. An offer letter that says “1% of the company” invites a dispute later. State the number of shares, and say the grant is subject to board approval. If you’ve already made percentage or verbal promises, have the board approve grants now at a share count and today’s fair market value. See Exact Share Numbers and Promising Equity vs Issuing Equity.
Options have to be granted under a written equity plan, approved by the board, with an exercise price at least equal to fair market value. Once you’ve started granting options, that usually means a 409A valuation. Options granted at too low a price can create tax problems for the employee. Adopt the plan and pool at incorporation, use restricted stock for the first hires before your first 409A, and get a 409A before granting options. See Employee Stock Option Plan and 409A Valuation.
Not safely. An employee who works now is owed at least minimum wage now, and unpaid wages carry penalties under state law. An “agreement” to pay later is a debt that shows up in diligence, and it can be enforceable even if it was never signed. For founders, the better approach is to set salary to zero in writing, approved by the board, until the company can pay. See Startup Founder Salary and Can Startup Workers Be Paid Only in Equity?
No. An employee is exempt only if their salary meets the federal and state minimums and their actual duties fit an exemption. Support, inside sales and operations roles are often non-exempt at startups, whatever the title or salary. Misclassification means back overtime plus damages and legal fees. See Exempt vs Non-Exempt Employees.
Generally no. Federal labor law protects most non-supervisory employees’ right to discuss pay with each other, and states including California and New York have their own pay-discussion protections. Remove any “pay is confidential” rule from offer letters and handbooks. You can still protect genuinely confidential company information, such as other employees’ records that an HR manager handles.
In a growing number of places, yes. California, Colorado, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Vermont, Washington and Washington, DC, among others, require a good-faith pay range in job postings, and several cities have their own rules. A remote job that could be filled by someone in one of those places is often covered. The safest default is to include a range in every posting.
Put them in writing: the metric, the measurement period, when payment is earned and what happens if the employee leaves. A vague or verbal bonus promise is a wage claim waiting to happen, and once earned, a bonus or commission may be treated as wages owed at termination. California requires commission plans to be in a signed writing.
Equity grants always do. Officer compensation, including founder salaries, should be approved by the board too, and that matters more once you have outside directors. Missing approvals are easy to fix with a board consent but look careless in diligence. See What Does My Startup’s Board of Directors Need to Approve?
Once the legal basics are in place, the common strategic mistakes are making each offer up on the spot, with no compensation philosophy or pay bands, which leads to inconsistent and unequal pay. Others are ignoring geography, or not deciding whether remote pay depends on location. Many startups don’t explain equity to employees, so they either overvalue or ignore it. And benefits and market pay are rarely revisited as the company grows. None of these needs a consultant early on. A one-page philosophy and simple bands by level will cover the first few dozen hires.
For related reading, see How Much Should I Pay My First Startup Employees?, Startup Employee Equity and What Should Founders Know About Startup Employment Law? If you’d like help reviewing your offer letters and compensation practices, contact us.
