Startup employee equity

Startup employee equity

Author: The Carta Team
Read time:  3 minutes
Published date:  4 March 2022
Updated date:  1 May 2024
Three experienced startup founders narrow down six key factors to consider when deciding how much startup equity to give your first 10 employees.

Your startup’s first employees have the opportunity to make the biggest impact. But how much startup equity should you give to early employees? For many startup founders, determining how much equity each early hire gets isn’t always clear-cut. 

We spoke to three experienced startup founders to narrow down six key factors to keep in mind when thinking about how much startup equity to give your first ten employees.

Have an option pool from the beginning

This is the first step when you’re considering equity compensation. An option pool is a chunk of equity set aside for employees that helps to evenly distribute the share dilution of each shareholder’s ownership as the company grows. Startups typically reserve 13% to 20% of equity for their employee option pool; every company has different cash and talent requirements, which explains the large percentage range. 

Think about salary and equity together

Equity is only one part of an employee’s compensation package. You’ll also have to decide how much to pay your early hires. Working for an early-stage startup could mean agreeing to a below-market salary or even a pay cut. The bigger the gap between the salary you can afford to pay and the market rate, the more equity you may want to offer an employee.

David Steinberg, Founder of strategic marketing company Zeta Global, recommends asking yourself, “What’s the cash consideration an employee is giving up to work with you?” Say, for example, you want to hire an employee who was previously making £100,000 a year. If you can only offer them a salary of £70,000, you’ll have to make up for that gap by offering more equity in your company. 

Sometimes those tradeoffs are significant. Chris Wentz, Founder of universal smartkey technology startup EveryKey, says that one of his earliest employees was willing to forgo a salary entirely for the first two years. He rewarded that employee with an outsized equity grant. “They got a significantly higher percentage of equity than somebody taking home pretty close to their market rate in salary,” he says.

Levels and fields matter, too

Understanding the level of each of your first hires will help you plan your overall compensation strategy. If you’re bringing in a C-level executive or a top engineer as one of your first hires, those roles will command a premium.

The field each hire works in matters, too. For example, candidates with considerable engineering or product experience are often in high demand and tend to expect the largest equity grants. In other roles, such as sales, the expectation is likely to be more cash and less equity.

Demonstrate the value of your equity

Ultimately, all these considerations about equity percentages have to be grounded in the value of that equity. “The sooner you can find some kind of valuation for your company, the easier this exercise becomes,” Wentz says.

Of course, at its early stages, a startup’s valuation merely reflects investors’ opinion of its worth. Typically, its equity is not liquid. While employees and founders hope it’ll be worth much more later, they understand that the value of their equity could be underwater. A valuation can serve as a concrete starting point for both sides to evaluate equity grants.

Be transparent

Regardless of how much equity you decide to give to early employees, make your rationale clear to employees from the start,  recommends serial tech company founder Joe Beninato. “It’s important to be equitable and transparent about what’s happening,” Beninato says. “That means telling them, ‘We have set aside this much in an employee equity pool and you are either getting X percent of the pool or Y percent of the company – and we think that’s reasonable or higher than market rate.” 

Have a contingency plan in place

One of the biggest mistakes founders make is not being prepared for the unexpected. Employees or founders may leave a startup prematurely, and discussions around what happens to their equity can quickly get messy. Steinberg says a vesting schedule and a buy-sell agreement will clarify the process for everyone.

A buy-sell agreement is a legally binding contract that requires the departing employee to sell their equity back to the company at a predetermined price. This arrangement can reduce the risk of disputes.

By putting a plan in place, you can mitigate the potential downsides. “Whenever somebody with an appropriate vesting schedule and cliff decided to leave the company, I’ve never felt regret at the equity they walked away with,” Steinberg says, “because that person put in the work.”

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The Carta Team
While we believe in assigning ownership at Carta, this blog post belongs to all of us.
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