How can early stage startups compete for talent against big tech?

Note: These are my raw opinions on approaching startup hiring. It is heavily influenced by my experience at Prepared. I would love all feedback!

One major challenge that I have had while working at Prepared is figuring out how to compete for talent over Big Tech. This is especially an issue for early-stage startups. They are being out-competed on almost all fronts: salary, stability, work-life-balance. There are always larger startups, ones with more money, ones with more revenue, or ones that are working on ‘cooler’ technology. With all these other factors, how can an early-stage company compete for top talent?

This question comes up constantly when trying to attract top engineering talent — especially ones who are willing to take a pay cut to join an early-stage startup like Prepared.

The following is how I think about answering this question and competing for 10x engineers.

Why can’t startups compete on compensation?

Let’s quickly break down how startup compensation works and why many engineers get turned off by it.

Assumptions: You’ve raised a $3 Million Seed Round at $15-30M Post-Money Valuation. You want 24 months of runway. You set aside 20% for non-payroll expenses. That translates to $1.2M per year for payroll.

Given the following mean employee salaries:

  • $200,000 —> You can hire 7 employees (including yourself!)
  • $150,000 —> You can hire 10 employees

The median senior engineer at this seed-stage startup would get 0.450%* of the company. At your valuation that is $17k — $33k in equity a year.

At the most recent valuation, the total compensation of the engineer at the current round will not get close to rivaling that of a big tech company. Based on the math above, the total comp will be ~150k in salary and ~20k in equity a year, or $170k total.

** pulled from Pave’s Cap Table Integrations Dec 7, 2022.*

How can startups compete?

You are going to need to convince an engineer to take $170k in total comp. They can probably get $350k total comp from a big tech or later-stage startup. How do you approach this?

Put simply, we approach this challenge as not viewing us as a competition against big tech companies. Instead, we recognize that we are a fundamentally different work offering than a big company and thus are looking for a different type of talent with a different set of priorities.

Recognizing who not to pitch to

Everyone has different values based on their stage in life. If someone says they value money over anything else — they need money to start a family, pay a mortgage, send kids to college, send money to family, donate to others, etc. — these are fair responses. It’s good to recognize their priorities early on and work with them to make sure their values do align with what the company needs.

If an employee is only looking for a salary increase over their current job, this is a misalignment of values for our side. There will always be another company that will pay more than you. If all the candidate values is salary, and that's what motivates them, then what is stopping them from leaving to join another company when the next big offer comes? This has happened to us and will happen again in the future. We want to hire people that will stay for 4+ years.

There will always be another company that will pay more than you.

It starts with the interview process

We start the interview process with one of our values: transparency. We want to work with the candidate through a mutual assessment of if they will thrive in a startup environment.

We ask questions like “What are your priorities over the next 2-3 years?” “What do you want out of the company you are to join?” Not only do these questions test the awareness of the candidate of themselves but also if the employee is likely to be happy if they were to join. A lot of the time engineers looking to leave big tech companies for the first time are in a bit of a discovery phase and may not know this. Helping work through this with them through this discovery process can be very enlightening on both sides.

We are very open with the challenges that the startup will be facing over the next 2 years while we try to raise our next round, and we want the candidate to be excited about solving those challenges. Painting this picture can help with internal conviction on if the candidate can see themselves at your startup and if you see them “in the trenches” with you. We find ourselves pitching against the company as much as we are pitching for it.

We find ourselves pitching against the company as much as we are pitching for it.

Show you care (and actually care!)

Founders should and need to care about their employees. Many believe that work is purely a transactional relationship, and this is mostly true for large-scale companies. Large companies are unable to provide the care and attention the way that we are able to do at a small startup. We pride ourselves in working with our employees every step of the way to make sure they are set up for success in what they want to do.

At early stages, we are able to provide opportunities for growth and larger responsibility because we place much more trust in each employee. We want to hire people who will learn and grow with us and the company.

I advocate for showing the same care you show to current employees to potential candidates that are truly can’t miss. Showing this care throughout the interview process shows to potential candidates what it could be like to work with you.

We approach showing this care in the interview process with:

  1. Identifying where they are happiest now and where they want to be in 3-4 years.
  2. Showcasing how that is possible at Prepared (and if it isn’t, describing why)
  3. Being extremely open and transparent about the company, its successes, and its challenges.
  4. Crafting a personalized offer letter/offer deck that outlines what kind of impact they will have if they join.
  5. Putting the candidate in touch with technical investors, product mentors/advisors to show them the support network they can tap into if they were to join.
  6. Putting the candidate in touch with other employees that have similar aspirations and can speak about what it’s like to work for the company.
If you want to attract talent that will have an outsized impact, you have to put an outsized amount of work in.

Emphasizing Impact

We want to hire people that are excited about joining a startup, about being a part of creating something big.

That kind of impact doesn’t exist in a big company. A new employee won’t come into a big company and create an outsized impact. They won’t directly reap the benefits of their work through equity. They won’t get the opportunity to reach outside of their initial role and experiment and do 20 different things.

If those things don’t matter to a candidate, and they get excited by stability, salary, or name of a big company, then fundamentally, you want different things. You can want different things than what a startup offers and still be an exceptional engineer. There are a ton of those people in big tech and places that will excitedly hire them.

Focusing in on this impact through an offer deck, even going as far as to showcase what specific projects they will be working on if they joined today, and how their work will directly translate to a better future state in the world will speak volumes to a candidate that is conflicted on which company to join.

It takes an outsized amount of work to create an outsized impact in the world.

Emphasize Future Value

Many, if not most, engineers find it difficult to understand what equity is worth. Thus, they discount it early in the process and only really think about cash compensation. It is vital that startups put in the effort to educate the candidate on what equity is, and how it works.

With each offer, I try to emphasize the future value with 2 slides in the offer deck. The first slide is an offer with a lower salary and higher equity and the second is the inverse. Both include a graph projecting the prospective employee’s total compensation at the last round, the current round, and the projected future round.

Note: These are fictitious numbers for a fake candidate at a fake seed-stage company inspired using data from Pave’s Cap Table Integrations (Dec 2022)

Putting these numbers in perspective can make a candidate do a double take on what the value of the equity is actually worth. It helps shift their mindset to the future.

Think Long Term

When I initially started hiring, I was thinking about it in a short term mindset: “I will only be hiring for the next quarter, then I can finally get back to the product.” I realize now that this mindset was discounting 2 things:

  1. An engineer that is not interested right now may be interested in the future.
  2. We will always be hiring in the future!

Thus, recently I have begun to think about hiring as a multi-year long process of building relationships with people that are super exciting. The theory is that if you do this for long enough, the timing might work out and eventually they might be willing to join your company. It truly is a plus on both sides — you see their growth over multiple years and they see your company’s growth and impact. I’m in the early stages of this thinking myself, but I think it fits well with the mantra: “Always be hiring”

In Summary

I've found these tactics to be helpful throughout our recruiting journey. I’m not saying these are perfect and I am most definitely missing many that would be valuable.

To put it cleanly: show a candidate you care about them, put the effort in, highlight your strengths and the company’s impact on the world, and be radically transparent with what you expect from them and what they expect from you.

These don’t always work out, but it does leave candidates in a place where they love the company and leaves the door open in the future for when they are ready to make a move.

For example, this is a message we received from a candidate that rejected us:

I think about what we chatted about on the daily. […] You and the team have helped me so much already – if there’s any way I can help back please don’t hesitate to let me know.

It can be easy to lose hope from these rejections, but it makes it all worth it when you finally get the right hire.

As the saying goes, hire slow, fire fast.

If you are interested in discussing anything in this blog post or learning more about Prepared, feel free to contact me: neal @ prepared911 (dot) com and I’d be happy to chat!