Determining Equity Grants for Startup Employees

An entrepreneur recently asked me for advice regarding the amount of equity to grant to a key hire. There’s a fair amount of information online with the following rough values for a Series A-stage company (the values can vary dramatically for a number of reasons):

• CEO – 5%
• C-level – 2%
• VP – 1%
• Director – .5%
• Manager – .25%
• Engineer/specialist – .1%

Percent ownership is only one piece of the equation, and is best viewed in the context of a number of factors like preferred stock preferences, strike price (assuming stock options), money raised, etc.

Instead of percent ownership, I prefer approaching it in the same manner as Fred Wilson. Here’s a quote from his post titled “Employee Equity: How Much?”

The key thing is to communicate the equity grant in dollar values, not in percentage of the company. Startups should be able to dramatically increase the value of their equity over the four years a stock grant vests. We expect our companies to be able to increase in value three to five times over a four year period. So a grant with a value of $125k could be worth $400k to $600k over the time period it vests. And of course, there is always the possiblilty of a breakout that increases 10x over that time. Talking about grants in dollar values emphasizes that equity aligns interests around increasing the value of the company and makes it tangible to the employees.

So, the next time you’re discussing equity with an employee, explain all the parameters but focus the conversation around dollar values and expected outcomes.

What else? What are your thoughts on determining equity grants for startup employees?