08 Dec How much Equity to give your Early Employees Part 1
How much equity is good enough for a startup employee? How can you guarantee you will keep this skillful new talent with a fair equity share? This two-part article post will provide a detailed view on important definitions as well as suggestions and factors that help resolve these questions.
Once you have managed to gather enough money to build your startup, you now need to think about employee equity. As you hire new team players to come help in this exciting journey, decisions need to be made on how to be fair and distribute the right amount for your employees, co-founders and you.
Any new hire coming to a startup company, aside from settling for a lower salary, often takes the job offer because they believe in the great potential the company’s purpose has and the benefits that will come on a long term. Part of your negotiation tactics to hire top new talent is the offer of a rewarding upside and equity. It can be a controversial topic but has to be discussed from the get go. The early employee equity share must also be competitive to what is on the market. What other startups are offering is driving the percentages up. And the idea is to keep your employees, not lure them to the competition.
This non-cash compensation of company ownership must be well thought of and executed. Much of it relies on having the right counseling and covering what is best for both parties. Plan ahead on all legal, tax and accounting aspects of this complicated affair. A potential startup employee will want to make sure they negotiate a decent stock compensation and have a nice number of shares. They will also look at negotiating the right terms within those stock grants maintaining their expectations and what they think is the value that they are receiving when they come on board.
Offering stock based compensation in addition or instead of a new hire’s salary intends to motivate the early employee to operate efficiently to elevate the share prices in the best interest of all shareholders making it a lucrative deal for all those involved.
A really important detail that initial stage startup founders need to consider when calculating equity, is the amount of contribution an early employee gives the company and the percentage ownership they will eventually receive once the venture capital financing reaches millions of dollars in funding. The early stage startup employee is a great contributor in the company’s growth and its ability to brace that financing from zero dollars to the greater amounts that elevate the company’s value. As a founder, you will need to ask yourself if this compensation ownership percentage is appropriate to the percentage of the company’s value that the team created altogether.
The employee equity split should not make you feel like you are the only one out there with this problem. Even Kevin Systrom, co-founder of Instagram, says he has never quite understood the whole thing but knows that the basis of employee equity comes from hard work and how it should be rewarded. “You should try to be as fair as possible for the stage of the company and the work people have put in before or after. Treat your employees really well. When you bring on people and you have a large option pool, make sure to be generous because those are the people that are going to stay with you until 4 a.m.”.
On my next article post, we will look at some suggestions on how to calculate a fair stock compensation and thoughtful employee equity split. Feel free to leave your comments and share how you may have managed the employee equity compensation in your company.