Startup equity: how much to give employees

Giving employees equity is an excellent way to attract top talent, incentivise employees and offer compensation, especially in the early days of a startup when you might not be able to offer large corporate salaries.

In this article, we’ll cover what you need to know about how much equity to give employees. We’ll look at the benefits of giving employees equity, how much of the total company equity to reserve for employees and how much equity to give individual employees based on seniority and the company’s stage. We’ll also cover what startup equity is and how distributing it works.

• What is startup equity?
• Why give employees equity?
• How startup equity works
• How much startup equity to give based on company stage
• How much startup equity to give employees by seniority
• How much startup equity to give advisors
• Summary

What is startup equity?

In business, equity refers to the amount of money each shareholder would get if all the company’s assets were liquidated and debts paid off. Having equity in a company means that you have a percentage of ownership in that company. Equity is usually divided among founders, investors, employees and advisors.

A company starts out being 100% owned by the founders, meaning they hold 100% equity in the company. If there are multiple founders this percentage will be split among them according to the contribution they make (e.g. 50/50 or 20/20/60). Equity in the company is later given to investors in exchange for capital. After that, another chunk of equity is given to employees and advisors in exchange for their expertise and dedication.

Each company only has a limited amount of equity to give, and it’s up to the founders to decide how much ownership they want to give away, and how to distribute it amongst various stakeholders. The chart below shows the distribution of equity amongst stakeholders in an example company.

Why give employees equity?

In an early stage startup, you’re competing with large corporate salaries. Many startups give employees equity to attract top talent and make up for the salary gap.

Plenty of startups also offer equity in addition to paying high salaries to attract the best employees and make them feel invested in the company.

Looking forward to the opportunity to sell valuable shares for a large sum of money a few years down the line is a great motivator for talented employees.

Although it’s become common for startups to give employees equity, any company no matter what size or stage can award equity.

Giving employees equity is the perfect win-win, here’s why:

• It aligns employees to company goals as their financial reward is directly linked to the success of the company
• It promotes long-term commitment in employees
• It improves team cohesion and company culture
• It attracts top talent
• Giving equity away to various stakeholders means there is less of it for founders, however, they are gaining expertise, commitment and perspective in return, which increases the probability of success

How startup equity works

When it comes to giving employees equity, there are three key areas that will determine how it works in your company and how much you give.

1. Stock vs stock options 

A good way to give employees equity is through stock options. This is because someone who purchases stock becomes a shareholder in the company (with voting and other shareholder rights) immediately.

To grant stock options, on the other hand, gives someone the right to buy stock in the future. The rights associated with this stock can only be accessed once the stock is purchased. Most companies give employees equity in the form of stock options.

2. Decide your option pool size 

The amount of equity set aside for employee options is known as an option pool, or employee equity pool. The decision on how many options to give each employee will vary depending on the overall size of your option pool (a bigger pool means you have more equity to give them).

3. Choose your options 

There are two types of employee option schemes to choose from in the US. These are Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs).

ISOs can only be granted to employees, but NSOs can be given to anyone, including employees, contractors, advisors, and board members, making them much more flexible to grant.

So should you grant employees ISOs or NSOs?  If you’re offering stock options to employees, ISOs are better for them. But, there are a lot more rules around ISOs than NSOs. Choosing the correct option can be a daunting task. To make sure you pick the right one, book a call with the team who will help point you in the right direction.

How much startup equity to give based on company stage

Generally, the relative amount of equity you give away as the company grows will be dependent on company cash flow. Earlier stage companies can’t normally afford to pay the market salary value for employees and therefore equity option compensation for first employees is higher.

How much startup equity to give employees by seniority

How much equity to give an employee based on seniority is affected by:

• How much equity is available in the employee option pool
• The value of the employee to the company
• How much qualifies as a competitive offer that will incentivize them to stay

How much equity should I give C-level executives?

C-level executives include Chief Operations Officer (COO), Chief Technology Officer (CTO), Chief Financial Officer (CFO), Chief Marketing Officer (CFO), etc. Most Series A and B startups will have no more than three true non-founding C-level execs.

Options are generally granted at 0.8 to 2.5% of the total diluted equity amount for C-level execs.

For Vice-Presidents, you might grant a lower amount of 0.3 to 2%. You’re likely to have five to eight VP’s in the organization at Series A and B.

How much equity should a company with 50+ employees give?

The larger the company valuation, the more employees you have, so the less of an option pool you have to give away.

In terms of what value of options to give away to non-executive staff members, the general recommendation is as per the table above.

Of course, all these percentages are guidelines. It depends on both what the company is willing to offer and what the employee wants.

Should you offer your whole team equity options or only some individuals?

When the whole team is offered equity options, it means that every hire is invested in your business. It encourages collaboration and has the power to create a cultural shift in the business emphasising that everyone is in it together.

There are also advantages to not offering everyone equity options, though. If you don’t offer every employee options, it allows you to be selective with option distribution and only give options to key hires or star performers as a reward and an incentive to stay with the business.

You could strike a balance and offer a bit of both – give everyone in the company a low base value of options on joining, then allocate extra to the key performers as a reward.

Whether you should offer the whole team equity options or only some individuals comes down to preference. There is no right or wrong way to allocate equity options.

How much startup equity to give advisors?

Advisors are experts whose knowledge is very valuable to a company and can help to make decisions. The way in which companies compensate advisors varies a lot. Some are compensated with salary and equity, while others are compensated with only salary or only equity. In some cases, they are not compensated with either. It all comes down to the circumstances. Our research shows that the majority are compensated with equity only.

As a general rule, early stage startups compensate advisors with 1% equity in the company. This amount varies according to the advisor’s expertise, role within the company, and the stage of the company.

Advisors generally include:

• Board advisors
• Technology advisors
• General advisors

Summary

There are various factors that affect how much equity to give employees. These factors change as the company grows and changes, so it’s important to constantly revise how much equity you give. In summary:

• Decide on the size of your option pool (usually 10% of company equity)
• Choose which schemes suit you and your employees
• For early to mid-stage startups, assign a percentage of total company equity to employees based on their seniority
• For growth-stage companies of 50+ employees, assign equity according to a percentage of the employee’s salary

Ready to give your employees equity?

Stock options can be a game-changer for attracting and retaining talent (especially when raising salaries isn’t an option). Giving your team a stake in your startup’s success will build long-term loyalty and of course, help build your business.

If you want to put options in place for your company, and you’d like to know where to start, book a call below and we’ll help you out.

Or, if you prefer to get started on your own, you can start your 7-day free trial here.