How Much Equity Should Founders Give To Early Employees?
How Much Equity Should Founders Give To Early Employees?
And how to negotiate equity with candidates
Picture this: you’ve found the perfect engineer to join your startup as your first employee, AND they’re interested.
Then they ask “how much equity are you able to offer?”
You freeze — you’re wondering what they’re expecting, what’s normal, and how to negotiate.
The recommendations I read when I was starting out as a founder were highly inconsistent, but this playbook should help make all employee equity decisions easier 👇
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How Much Equity to Give Early Employees
First… How to Set Up An Employee Equity Pool
An employee equity pool is the amount of shares set aside by the founders for distribution to employees. You’ll set one up when you’re first creating your company. Without it, you won’t be able to easily and quickly issue shares to new employees.
If you set up your corporate entity with Stripe Atlas, which I recommend, you’ll be able to select between 5-30% of your shares to remain “unissued” and be reserved for future distribution to employees.
Stripe defaults to 15%, and Carta claims the average is 13-20%, but I recommend lowering it to 10%.
You’re able to “replenish” the equity pool at any time by creating new, unissued shares. Typically, replenishments happen in tandem with fundraises since new shares are being created for the investors joining the round.
If you already have cofounders then 10% is plenty to get you to an initial fundraise, and the data below from UK startups shows it’s nearly standard (which has been my experience across the hundreds of founders I’ve worked with as well):
With that said, if you anticipate needing a high number of highly skilled employees (like specialized engineers) don’t be afraid to reserve a larger amount of equity for employees.
If you’re not using Stripe Atlas or a similar tool, you’ll likely want your corporate counsel’s taking care of the creation of the equity pool.
How to Determine How Much Equity to Give a Candidate
The First Thing You Should Do
Whatever you do, don’t hand out equity grants on a case by case basis. There are factors (below) that cause grant size variations between employees, but those variations need to exist within a singular framework.
The first thing you should do, instead, is define a simple framework for equity grants that you will apply consistently.
To do this, use a standard percentile. Will you offer equity grants in the 90th percentile relative to comparable roles at other companies, or the 50th, or something else?
This is your starting point. The other factors (below) should also be included in your framework.
Using a standard percentile allows you to offer equity grants that are consistently perceived the same way by candidates. In turn, this makes your job of selling them on the idea of joining your startup easier — since your pitch will be similar each time.
Some startups choose to offer aggressive grants, and make their sales pitch about the value of the equity. Others choose lower grants and a sales pitch that’s more focused on the learnings and experience employees will get, or something else.
There’s no right answer — just be consistent.
Ideally you never change this framework even as you scale or, at least, not outside of adjustments you make immediately following a fundraise.
Factors that Influence Equity Grant Size
The percentile you choose isn’t the only thing that impacts grant size. Other common factors include:
Role Type → Different roles have different norms. Standard practice is that roles that are harder to recruit for, and provide more leverage, like engineers can demand higher grants. Roles that make cash commission, on the other hand, sometimes don’t expect a grant at all.
Role Importance → Engineers may be less valuable to one startup than another. My last startup was, for quite a while, entirely an IRL product that could be supported by no-code tools. But a highly technical self-driving car startup would want to offer larger grants to engineers, and the engineers would likely know they have more leverage in negotiations.
Candidate Seniority → I say seniority here instead of “quality” because everyone you’re hiring early on should be a rockstar.
Employee Number → The first non-founder who joins a startup is taking on considerably more risk than the 10th, or even the 2nd.
Location → It’s an unavoidable fact that equity norms are different in different countries. For example, Index Ventures makes the point that candidates in Europe “are generally less willing to compromise on cash compensation in return for more stock options.” Know the employee’s market’s norms and their expectations when putting grants together.
Cash + Other Considerations → If candidates ask for higher base salaries or other forms of compensation, you can consider a reduced equity grant as it may not be a primary motivator for them.
Recommended Equity Grant Sizes
Most of the resources I’ve found on this create charts based on median data (see below) or generalized recommendations that assume similar role-type hiring patterns across all startups.
Stripe
Stripe’s Equity Guide was put together by Yin Wu, a YC founder currently building an equity management platform called Pulley that I recommend. She’s also written about employee compensation on Twitter.
In the guide, she lays out her framework for pre-funding and pre-seed startups:
1-3% for key executives (e.g., VP of sales or VP of product)
0.5-1% for early ICs in technical functions (design, engineering)
0-0.5% for early ICs in commercial roles (bizops, bizdev)
This is an easy-to-understand framework, though I’d argue that hiring a VP of anything that early is likely premature, and that your first engineer may require more than 1%.
Carta
Carta’s report on equity pool sizes is the most recent data I was able to find. Unfortunately, their charts don’t break things out by role type, but they may be useful regardless:
An interesting observation is that option pools grow as startups do. I would imagine this is because grant sizes get smaller at a slower rate than headcount expands.
Index Ventures
Index has an extremely robust report for seed stage startups, specifically, and even went so far as to create their own massively detailed calculator.
Using data from 2018, they put together the below recommendations, but note that larger grants may make sense in “specific situations.”
If you’re at the seed stage (or even later on) this can be a helpful resource. If you’re earlier than that, it’s probably overkill.
Hustle Fund
A blog post Hustle Fund put out notes that a typical equity situation can look like this:
Co-founder: 30%
Employee #1: 3%
Employee #5: 0.3%
Employee #15: 0.03%
Angel List
I didn’t find any recent info from AngelList, but here’s some data from job postings in 2014. It’s interesting to see how things have changed over time:
Leo Polovets analyzed it in more detail here.
How to Navigate Equity Negotiations with Candidates
Good startup employees are smart and know that their equity may never be worth anything. However, they also know that it’s potentially the most valuable thing you’re able to offer them (since they’d likely be able to command a better salary elsewhere).
As a result, they’re going to want as much equity as they can get (when candidates try to get more equity, it’s a great sign that they believe in you and the startup).
I highly recommend being transparent about what you can realistically offer early in the process, to avoid surprises and wasted time.
This way you avoid an emotional conversation, and instead build trust with the candidate once they see you aren’t trying to rip them off.
Candidates may try to gather their own benchmarked data from LinkedIn’s salary tool, Paysa, or GlassDoor — this is exactly why using a site like Pave is so important. The data is more heavily verified and you can feel confident standing behind it.
📚️ Founder’s Library
Top venture firm Index Ventures created this employee option calculator for founders at the seed stage.
Pulley has a database of helpful guides for founders on employee compensation.
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