Startup Raises After Additional Funding: Common Practices and Considerations

Issuing raises to employees following an additional funding round is a common practice in the startup world. This phenomenon is often attributed to the increased financial stability and growth potential that new funding brings. In this article, we explore the various factors that contribute to this practice, common experiences of employees, and the nuances that can differ based on the startup's specific circumstances.

Increased Salary Budgets

When a startup raises additional funding, one of the first things they consider is the allocation of funds towards employee compensation. This is often done to enhance employee satisfaction and retention. With more funds in the budget, startups can provide better salaries, which can help them attract and retain top talent.

Performance Reviews

New funding can coincide with performance evaluations, providing an opportunity to review employee contributions and provide raises. These evaluations can be crucial in determining who is eligible for a raise and how much they should receive. This process is a way to recognize outstanding performance and motivate employees to continue delivering high-quality work.

Market Adjustments

Startups may also adjust salaries to remain competitive in the job market. This is especially true if they're trying to attract new talent or retain existing ones. In highly competitive industries, keeping salaries competitive can be a key factor in retaining top employees and attracting new hires.

Equity Compensation

In addition to salary increases, employees might receive additional equity or stock options. These can be more valuable if the company grows and sees significant increases in valuation. This form of compensation aligns the interests of employees with those of the investors and can be a powerful motivator for growth and success.

Personal Experiences and Nuances

While these practices are common, they can vary widely based on the startup's financial situation, culture, and overall strategy regarding employee compensation. Personal experiences can be quite varied, depending on the initial agreements, the startup's financial stability, and the collective mindset of the team.

Advising on Initial Agreements

It's often advised that everyone involved in a startup should agree to take a significant salary cut initially. This helps ensure that the startup can allocate funds towards growth and avoids the risk of spending all the money on salaries and failing to launch. Maintaining some jobs for the first couple of years can help build a stable foundation. Additionally, a 15% contingency rate is usually reserved for administrative costs related to setting up the startup.

Valuation and Negotiations

The amount of raise issued can also depend on the valuation set by the new investors. It's important to have open and transparent discussions with the higher-ups involved in securing the funding or to discuss these matters with the founders if you're the one starting the company. Each round of funding and the resulting valuation can influence what is feasible for raises and other forms of compensation.

While raises are common, the specifics can vary greatly, and it's crucial to understand the context and agreements in place. Whether you're a startup employee or a founder, being aware of these dynamics can help in navigating the complex landscape of startup compensation.