Including equity in your compensation plans is always a good idea, especially for startups. Not only will employees and potential employees expect it, but it buys you quite a few benefits when cash is low at the early stages of your company.
Why should you include equity in your comp plan?
Use equity to recruit and retain super-talented people — and when you’re wanting to incentivize future success and reward past performance. Equity also creates cohesiveness, alignment and culture, because you are all commonly aligned in working for the success of the company. And it gets you all this without using cash. Cash salary and bonuses come today, but the real value of equity to employees is in the future.
How should you include equity?
You’ll most commonly grant equity by using employee stock options, which is when the employee has the right, but not the obligation, to buy shares in the company at a set price over a specified timeframe.
You’ll need to decide how much equity you want to set aside to put in your overall employee stock plan (ESOP) pool, which will be a percentage of total equity in your company. For an early-stage company, such as seed to A, you might put about 7.5% to 10% of equity in the ESOP pool. As you get higher valuation and more financing, that pool might go up to about 15%.
Who should get equity?
You’re using stock options, and you’ve got an ESOP pool, so now you have to decide who gets the stock option grants. I suggest giving grants to all employees, even junior staff, because it creates a collective vision for the company, which is especially important when you’re just starting up.
Be sure to ask yourself, “If I have this much in my ESOP pool, how much do I want to set aside to give to each person?” Even if some grants are smaller, make sure you set aside enough for everyone. You may have more grants for senior hires and maybe some additional allocations for super performers.
You’ll also need to plan for your hiring in the next 6 to 18 months and estimate how much you’ll need for each person, making sure there’s a bit of room for negotiation and enough for senior hires. That way, you’ll have a plan of how you’re going to use your ESOP pool in the best way for the growth of your company.
When you’re really early stage, for your first 10 employees, you might be granting about 1% of equity. Of course, it does vary with role and seniority, so it could be even 2% for a more senior role. When you’re very early stage, you can still think about this on a case-by-case basis. Ask yourself: “What’s in my overall ESOP pool? How much have I already given out to employees? How much is left unallocated within the pool?” Also look at it from the employee position: What’s their value to the company, and what market terms will they be expecting?
As you grow to a series B company or later, granting equity can be a bit more systematic. You can set amounts for specific roles and levels. For the c-suite, though, you might still tailor and negotiate a bit more, depending on the specifics of the person.
If you need help infusing equity into your comp plan, please reach out to me.