One of the biggest questions for any early stage company (or anyone looking to work for an early stage company) is how much equity to give early employees (including, in many cases, people ultimately categorized as “co-founders”). This is a topic I’ve thought a lot about, and I’ll get into my detailed thoughts in a later post. However, the starting point for anyone thinking about these issues should be to see what others in the startup community have said about the topic. Here is a collection of some of these approaches / opinions from respected parts of the startup community.
Paul Graham, founder of Y Combinator – Paul Graham, the respected founder of Y Combinator, has a very simple approach to evaluating how much equity to give a potential employee: “If i is the average outcome for the company with the addition of some new person, then they’re worth n such that i = 1/(1 – n). Which means n = (i – 1)/i. For example, suppose you’re just two founders and you want to hire an additional hacker who’s so good you feel he’ll increase the average outcome of the whole company by 20%. n = (1.2 – 1)/1.2 = .167. So you’ll break even if you trade 16.7% of the company for him.”
VentureHacks post Series A Compensation Ranges – This post at VentureHacks has some range data on what sort of equity compensation people get at post Series A startups. Slightly less applicable for pre-Series A companies, but still some data to think about. The post says that a COO could expect 2-5%; a VP, 1-2%; and a Director, 0.4-1.25%. One important note is that all of these ranges are after dilution from the Series A financing, so the pre-Series A numbers should be correspondingly higher for that and of course general risk reasons.
Hacker News, Y Combinator’s engineering-heavy news thread – Hacker News focuses on engineering topics, but the discussion about employee equity on this thread is heated and has a variety of opinions. Some people said that 1% for a technical role at a funded startup was quite generous; others said that early employees should be getting much more.
Fred Wilson, Union Square Ventures – Fred Wilson has some useful thoughts about deciding how to grant equity. He says that for the first few people you bring on board to fill out the team, there is no formula. They should get what you think they need to accept the offer and be properly motivated – they are extremely important employees for everything from setting the culture of the organization to executing on the product vision, and so their equity has to be decided on a case-by-case basis. After these team members are in place, Fred advocates moving to a strict formula based on the cash/stock split future employees receive.
Mark Suster, respected entrepreneur turned VC – Mark writes an excellent startup / VC focused blog, Both Sides of the Table. Although he does not have much in the way of hard numbers, his general framework for thinking about how much equity to seek is interesting. He breaks employees into two categories – those who are in the “learn” stages of their career and those who are in the “earn” stages of their career, and argues that if you are in the learn stage, the amount of equity is not as important as what you might be able to learn from the experience.
The Pyramid Approach – Although this is probably not a “respected member” of the startup community, this post discusses a formula based approach that I think mirrors how a lot of companies think about this question. Basically, the post argues that founders should reserve 20% of the company to pay the first 100 employees. The first 10 employees get 1% each; the next ten get 0.5% each; employees 21-30 get 0.25% each, and so on.
Joel Splosky on Dharmesh Shah’s Onstartups.com – Joel has another “layered” approach to dividing startup compensation. In his view, the founders should end up with 50% of the company, and then there are four layers of employees. The truly early employees, of which there will probably only be two or three, should split 10%; the next set of employees, perhaps ten, split another 10%; and so on.
David Beisel, Genuine VC – David Beisel is a former entrepreneur turned respected early-stage investor. David’s approach is to distinguish between two types of hires – senior level hires who could be expected to grow with the company, and junior level people brought in to fill a specific and smaller need. For the senior level people, focus on equity; for the junior level ones, focus on some reasonable amount of cash (if possible with the funding situation).
These resources should provide a good starting point for a company or potential employee thinking about the tough issue of determining how much equity is “right” or “fair” to give or seek. If you have come across other good resources or thoughts on this question, please let me know in the comments below!