Strategizing Salaries in a Startup for Growth

Every business bears the responsibility of compensating employees fairly.

With startups, the starting salary is usually low, but there is also potential for growth depending on how the company performs in the first few months.

Whether you already have existing funding or are looking for investors, your employees must be paid their wages at the end of the day.

Let’s look at how to determine fair compensation and manage payments in a startup.

Understand The Financial Basics Of Setting Up A Startup

Many new business owners are unaware of the financial complexities involved in establishing a new enterprise.

Doing a rough calculation of your seed capital and calculating how many months you can operate with that money is not financial planning.

Here are the first few things you should do:

Understand and study labour laws to assess the minimum wages, working hours and mandatory employee benefits.
Study payroll processes and review whether to appoint a payroll manager or opt for payroll outsourcing for timely and accurate payments.
Understand taxes and do appropriate tax deduction calculations.
Organize essential employee paperwork and forms – for insurance, identification, employment and tax purposes.

Funding Options To Pay Your Employees

Naturally, the easiest and risk-free way is to use your own money and savings for your startup.

But most start-up founders don’t have these huge amounts at their disposal and have to resort to other ways to finance their business.

Paying your employees a base sum for the first few months will require a significant investment and here are a few ways you can secure that initial sum of money.

Business Loan

A business loan is the most straightforward way to secure the necessary funds and comes with both advantages and disadvantages.

You will get a fixed cash flow, but the application process is long, interest rates are usually high and you will also need a strong personal credit.

Investors

If you are good at networking and have a strong pitch, you can find investors willing to invest in your startup contingent on certain criteria and a share of ownership in your company.

Angel investors are great options for startups since they usually don’t expect quick repayments. However, angel investors demand more equity.

Lines of Credit

A line of credit is a more flexible borrowing option where you can access more money when you need it and you pay interest only on the amount you borrow at the time.

It is useful in situations where you don’t want to borrow a lump sum of money that you aren’t sure you will be able to pay back.

Types Of Employee Compensation

In the first few stages of a startup, it might be hard for business owners to pay their employees high salaries, especially if they haven’t started earning anything.

While it is important to provide a base salary, it is also important to make sure your employees understand what they are getting in the first few months of their employment.

Employee Compensation

All employees must be paid a basic salary, and this must be coupled with other employee benefits.

You must make a sheet that shows the structural breakdown of their compensation.

This must be followed whether your startup has started making money or not.

Employee Equity

Many startups offer their employees equity shares in the company as a way to compensate employees fairly.

Stock Options

In order to retain their employees, many startups offer stock options where the employee will be required to stay with them for a certain period of time to get ownership.

Conclusion

If you already know that your funding is limited, don’t go out of your way to hire a huge team that you can’t pay.

Focus on quality over quantity – hire a few talented employees for the necessary operations and make sure you compensate them fairly.