The hourly or annual rate someone could earn for similar work from a traditional employer. Used in dynamic equity models to value time contributions. A developer's market rate might be $150/hour while a marketer's is $100/hour. Setting honest market rates is critical for fair equity splits.
market rate
noun — The compensation (hourly or annual) that a person with a given skill set and experience level could reasonably expect to earn from a conventional employer for comparable work. In dynamic equity models, market rate serves as the conversion factor between time contributed and dollar value of contribution, thereby determining the rate at which each contributor accumulates ownership.
Why it matters
In a dynamic equity model, time is converted to a dollar value using market rates, and that dollar value determines ownership percentages. If market rates are set unfairly, the entire equity split becomes unfair. A developer who inflates their rate from $150 to $250 per hour would accumulate equity 67% faster than they should, at the expense of their co-founders.
Conversely, undervaluing someone's rate effectively penalizes them for every hour they contribute. If a designer's true market rate is $120/hour but the team sets it at $80/hour, that designer is contributing 33% more value per hour than the model recognizes — a structural unfairness that compounds over months.
Getting market rates right is one of the most important decisions in setting up a dynamic equity arrangement. It is worth spending time on this conversation before any work begins, ideally referencing multiple salary data sources and agreeing on a documented methodology that all members understand and accept.
How it works
Market rate represents the reasonable salary or hourly rate that a person could command for similar work at an established company. It is not what you hope to earn, what you earned at your peak, or what a top Silicon Valley company pays. It should reflect what a typical employer in your market would pay for your level of experience and skill set. Resources like Glassdoor, Levels.fyi, Payscale, and the Bureau of Labor Statistics provide useful benchmarks. For hourly rates, divide the annual salary by 2,000 hours (approximately 50 weeks at 40 hours).
If a co-founder earns a partial salary from the startup, only the difference between their market rate and their actual salary is counted as a contribution. For example, if a developer's market rate is $150/hour and they are paid $50/hour by the startup, they contribute $100/hour of unpaid value to the equity calculation. When no salary is paid, the full market rate counts.
All team members should agree on each person's market rate before any contributions begin, and rates should be documented in the operating agreement or founder agreement. Rates can be reviewed periodically — annually is common — to account for increased experience or changing market conditions. Retroactive changes should be avoided to prevent disputes.
| Role (mid-level) | Typical annual range | Approx. hourly rate |
|---|---|---|
| Software engineer | $120,000–$180,000 | $60–$90/hr |
| Product manager | $110,000–$160,000 | $55–$80/hr |
| UX/product designer | $90,000–$140,000 | $45–$70/hr |
| Marketing manager | $80,000–$130,000 | $40–$65/hr |
| Operations / finance | $80,000–$130,000 | $40–$65/hr |
Note: Ranges are illustrative. Always verify against current benchmarks for your specific role, experience level, and geographic market.
History and origin
The use of market rates to value labor contributions in equity splits gained prominence with the Slicing Pie framework, introduced by Mike Moyer in 2012. Moyer's model was one of the first to formalize the idea that time contributions could and should be converted to dollar values using each person's market rate, and that equity should be calculated dynamically based on those dollar values rather than assigned upfront as fixed percentages.
The underlying concept — that different people's time has different market value — is not new. Employment law and economic theory have long recognized that compensation varies by skill, experience, and role. What Moyer and subsequent dynamic equity frameworks contributed was a systematic method for applying this principle to co-founder equity arrangements, giving teams a principled way to handle situations where one founder contributes 20 hours per week and another contributes 60.
As remote work and distributed teams have become common, the geographic dimension of market rates has become more complex. A developer in San Francisco has a very different market rate than a developer with equivalent skills in Eastern Europe. Dynamic equity frameworks have adapted by typically using local market rates — what each person could earn in their own labor market — rather than a single normalized rate, which acknowledges that the opportunity cost of contribution is local.
Frequently asked questions
What is market rate in the context of startup equity?
Market rate in startup equity refers to the reasonable salary or hourly rate that a person could earn for similar work at an established company. It is used in dynamic equity models to convert time contributions into dollar values, which then determine ownership percentages. The market rate is not aspirational — it should reflect what a typical employer in the relevant market would pay for the person's level of experience.
How do you determine someone's market rate?
Market rate should be based on credible salary benchmarking sources such as Glassdoor, Levels.fyi, LinkedIn Salary, Payscale, and the Bureau of Labor Statistics Occupational Employment Statistics. The rate should reflect the person's role, experience level, and local or remote market — not their peak earnings or what top-tier companies in expensive markets pay for top-of-band talent.
How is market rate used in a dynamic equity model?
In a dynamic equity model, each contribution is valued at the contributor's market rate. Hours worked are multiplied by the hourly market rate (annual salary divided by 2,000) to produce a dollar value of contribution. Ownership percentage is calculated as each person's total cumulative dollar contributions divided by the team's total contributions. Market rates are the multiplier that determines how fast each person accumulates equity.
What if a founder is being paid a salary?
If a co-founder receives a partial salary from the startup, only the difference between their market rate and their actual salary counts toward equity accumulation. For example, if a developer's market rate is $150/hour and the startup pays them $50/hour, they contribute $100/hour of unpaid value to the equity calculation. This prevents double-counting compensation that has already been received in cash.
Can market rates be changed after contributions have started?
Retroactive changes to market rates should be avoided because they create disputes about past contributions and undermine the trust the dynamic equity model is designed to build. Rates can be reviewed and updated on a scheduled basis — typically annually — to account for increased experience or changing market conditions. Any changes should only apply to future contributions, not to hours already logged.
What happens if team members disagree on market rates?
Disagreements about market rates should be resolved before any contributions begin. The best approach is to agree on a methodology — such as the median salary for the role on a specific benchmark site in a specific geography — and apply it consistently. Having a documented, objective process prevents disputes from becoming personal. Rates should be written into the operating agreement or founder agreement so they are legally binding.
Is market rate the same as fair market value?
The terms are related but distinct. Fair market value (FMV) is the broader concept of what an asset would sell for between willing parties — most commonly applied to shares and 409A valuations. Market rate specifically refers to the compensation value of labor — what an employer would pay for a person's time. In dynamic equity models, the market rate for labor functions as the FMV of each person's contributions.
Learn more
- Sweat equity valuation: how to put a number on work that isn't cash
- How to split equity in a startup: the complete guide
- When to convert from dynamic equity to a fixed cap table
- Why an LLC is the best structure for dynamic equity
Related terms
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