Knowing how much equity to give new employees in different roles can be tricky — here’s how to divvy up your cake.
So your start-up is growing? Your services are in demand, your revenue is tracking upwards. Maybe you’ve raised a round and things are looking up. You deserve a pat on the back, what was once a crazy idea is now a reality! But don’t get ahead of yourself, you’ve got plenty to do yet. Growth is the next step, but that also means hiring more people, potentially a lot more. You need to start attracting top talent - Cue Employee Share Options Plans (ESOPs), and stock option pools - but how do you divvy these up?
ESOPs are a way of granting an employee equity in your company by giving them options (which are converted into shares in the company) if they comply with the ESOP rules. Imagine your company’s equity as a cake, and you’re making sure each employee gets a piece.
There are two main ways to allocate options to your team:
- As a percentage of the salary - companies offer options to their team based on their salary, seniority, and type of role.
- As a percentage of the company - in this case, key people might get allocated a fixed % of the company's total equity. For example, a CEO or CTO might come in and receive 2-5% of the equity of the company over 3-4 years. Or an advisor might earn 0.1% to 1% per annum for their roles (see Founder Institute SAFT for advisors).
Let’s look at an example of how a company might ‘spend’ their option pool!
Founders and startups do need to work out how many options they need for their growing team, and make sure that there is enough for all the new hires - it’s kind of like a game of Tetris.
Stock options typically make up around 10% of total equity, but this is rising to 12.5% and even 15%, due to the cost of building teams.
Investors, management, and existing shareholders will negotiate the pool size as it equates to a potential dilution in ownership for them. Stock option pools can be smaller in size if established later in a company's life, where the share value is higher than that of an early-stage start-up. Quite often more options are added as companies progress and the available options are ‘spent’ by the company.
Working out how much equity for each role can be tricky too!
Working with these guides, and building up offers with a clear remuneration strategy that is based on salary can save you a lot of time and hassle.
Our friends at Blackbird Ventures portfolio analysis showed the following allocations:
- Average equity per role 1.32%
- Range 0.1% - 3.7%
- Average equity per role 0.33%
- Range 0.05% - 1.3%
- Average equity per role 0.45%
- Range 0.05% - 2.1%
And as you can see below, the amount of equity has increased significantly from 2018 to 2021, with non-tech and junior tech roles having less equity.
VentureHack has determined Silicon Valley-standard option pool breakdowns for hiring staff in a Series A start-up.
Data from venturehacks.com
ESOPs require some rule playing by your people if they want to convert their options to coveted shares! These rules include ‘time-based vesting’ conditions - which encourages retention. Options can not be converted to shares until they ‘vest’, which requires an employee to remain with a company for a predetermined period of time. Often this manifests as an employee receiving 25% of their shares after one year and the remaining 75% vesting monthly over the three years commencing on or after the first anniversary.
With every new investment round, the pool is generally replenished with fresh options for the employees which can attract new talent or top-up the options of existing high-performance players. Management needs to be able to juggle the forecasting of allocating new options to balance retention and recruitment, again it’s a game of Tetris!
Talent obviously comes at a price, and in some cases, compromising and giving an incredibly desirable candidate more equity than normal can happen. These kinds of people need to have a proven track record in elevating companies like yours or a skill that is very hard to find.
If a candidate is demanding significantly more, however, you might need to reconsider as the integrity of your remuneration plan is critical, and perhaps you could look at milestone-based vesting in some cases if special value creation is possible by a teammate.
We hope this helps to build and allocate your option pool and grow your team with confidence while developing a culture of ownership! If you need help with your option pool, reach out to the Cake team today.
If you liked this article, check out Employee Share Plan Jargon – All the terms, in simple terms or What is an Employee Share Option Plan, and why bother?
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