An important part of the startup ethos is equity and having an owner’s mentality, especially for early employees. Naturally, co-founders have a good chunk of equity along with investors, advisors, and employees. Early employees will often have equity in the range of .1% – 1%, depending on the role, experience level, and salary (executives and key hires often have larger percentages of equity depending on the stage of the startup).
Here are a few thoughts on early employee equity in a startup:
- Vesting of equity is common with it being either time-based (e.g. vesting over four years) or performance-based (e.g. vesting based on hitting milestones)
- Salary and equity should have an inverse relationship with market-rate salaries having less equity and below-market salaries having more equity
- Tempering expectations as to getting rich off early employee equity is important – I like to present it as if we do well, it’ll pay for a new car; if we do great, it’ll pay for a new house; and if we are a once-in-a-generation company, it’ll pay for a new life
- Cash compensation should cover minimum lifestyle expenses, if possible, otherwise the added stress of not making ends meet can derail the focus on making the startup successful
- Ownership percentages aren’t static – raising money from investors as well as issuing more stock options will result in dilution, which is a normal part of growing a business
Equity is an important and sometimes challenging topic. Early employees in a startup would do well to further research it and have a conversation with the founders of their startup.
What else? What are some other thoughts on early employee equity in a startup?
David Cummings on Startups 