What’s the best way to distribute employee equity?

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Valuation and Option Pool – AVC

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, “it’s just another way to lower the price”.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Valuation and Option Pool – AVC

Let’s say that the VC’s term sheet says that a 15% “fully diluted post money” option pool needs to be in the pre-money valuation. What that means is that the investor wants 15% of the company, after the financing is closed, to be in an option pool that has not been granted to anyone. … The bottom line is the deal I described leaves the entrepreneur and his/her shareholders with 65% of the company after the financing, the VC investor will own 20… (read more)

Sam Altman (President at Y Combinator)
Employee Equity – Sam Altman

Its very difficult to put precise numbers on this because the specifics of every situation matter so much. I’ve seen some startups offer 5 or 6 year vesting schedules. To compensate for this, they offer above-market grants. Another structure I’ve seen is back-weighted vesting. For example, 10% of the grant vests after the first year, and then 20%, 30%, 40% in the following years.

Sam Altman (President at Y Combinator)
The Engineer Crunch – Sam Altman

Granting equity should be easy to do. I have never seen a startup regret being generous with equity for their early employees. I’ve noticed that mission-oriented companies have a much easier time recruiting.

Paul Graham (Co-Founder & Partner at Y Combinator)
The Equity Equation

An investor wants to give you money for a certain percentage of your startup. Should you take it? You’re about to hire your first employee. How much stock should you give him? These are some of the hardest questions founders face. And yet both have the same answer: 1/(1 – n) Whenever you’re trading stock in your company for anything, whether it’s money or an employee or a deal with another company, the test for whether to do it is the same. You … (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Employee Equity: Too Little? – AVC

Since I started in VC, the percentage of a company that non-founder employees owned was always in the 15-20% range after the team is fully built out. In recent years, I have seen that number creep up to the 20-25% range and if you extrapolate current trends out a few years, it could easily be 30%.

Babak Nivi (Co-founder of AngelList and Venture Hacks. Previously, he was an entrepreneur-in-residence at Bessemer Venture Partners and Atlas Venture.)
The Option Pool Shuffle – Venture Hacks

Title Range (%) [for after raising a Series A] CEO 5 – 10
COO 2 – 5
VP 1 – 2
Independent Board Member 1
Director 0.4 – 1.25
Lead Engineer 0.5 – 1
5+ years experience Engineer 0.33 – 0.66
Manager or Junior Engineer 0.2 – 0.33

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Options and Offer Letters – AVC

What I generally suggest is that management have a standard options grant. It could be as simple as “everyone gets at least 1000 shares when they join, important role players get 5000 shares, directors get 10,000 shares, software engineers get 10,000 shares, senior software engineers get 20,000 shares, VPs get 50,000 shares. C level gets 100,000 shares” I just made that up. You should make one that makes sense to you.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Options and Offer Letters – AVC

I also suggest building an options budget. To do this you take your standard grant schedule, and then map it to your hiring and retention plan (I suggest granting options to current employees every two years as part of a retention plan) and then you will have an options budget for the next few years. That is a great thing to have.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Employee Equity – AVC

Where Andy [Rachleff] and I differ a bit is how to calculate how much equity should be granted. Andy suggests using market comps. I don’t like doing that because 0.1% of one company can be worth a lot more or less than 0.1% of another company. I prefer to issue equity based on a multiple of current cash comp divided by the current valuation of the business. I lay that all out in my Skillshare class.
While I don’t call out promotion and performan… (read more)

Sam Altman (President at Y Combinator)
Employee Equity – Sam Altman

Startups should give employees more stock. Value is created over many, many years. Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number 5 gets. Additionally, companies can now get more done with less people.

Sam Altman (President at Y Combinator)
Employee Equity – Sam Altman

As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.

Babak Nivi (Co-founder of AngelList and Venture Hacks. Previously, he was an entrepreneur-in-residence at Bessemer Venture Partners and Atlas Venture.)
Are founders really 1000x more valuable than employees? – Venture Hacks

Is it fair for founders to own about 100% of a startup while employee #1 only owns a few percent? Are founders 10-1000x more valuable than employees? The answers are: Yes, it is fair. Value doesn’t matter, timing does. When the founders start the company, it is worth approximately $0. So their equity is worth $0. Let’s say the founders work for 6 months, make progress, and then raise money at a $10M post. Then employee #1 joins and gets 1% of the… (read more)

Ben Yoskovitz (VP Product at VarageSale, VP Product at GoInstant (acquired by Salesforce), Author of Lean Analytics)
Changing Equity Structures for Early Startup Employees

0.5-1% is just not a lot. Those first few hires – done correctly – will be so insanely critical for the success of your startup; I believe they deserve more.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Sizing Option Pools In Connection With Financings – AVC

Here’s a formula I like to use. Take the cumulative salaries of all the hires you need to make betwen the current financing and the next one. Let’s say it is five employees at an average of $75,000. Then that number is $375,000. Then divide that number by the post-money valuation, in this case $5mm. That gives you 7.5%. That’s the size of the option pool you’ll need. And it is conservative because I don’t recommend giving options equal to the dol… (read more)

Leo Polovets (General Partner @ Susa Ventures)
Analyzing AngelList Job Postings, Part 2: Salary and Equity Benchmarks · Coding VC

Equity:
Hire #1: 2% – 3% of equity
Hires #2 through #5: 1% – 2%
Hires #6 and #7: 0.5% – 1%
Hires #8 through #14: 0.4% – 0.8%
Hires #15 through #19: 0.3% – 0.7%
Hires #21 through #27: 0.25% – 0.6%
Hires #28 through #34: 0.25% – 0.5%
These ranges indicate the maximum equity amounts offered by companies.

Joel Spolsky (CEO @ Stack Exchange)
How much equity should a partner with a short-term commitment be entitled to? – Startups Stack Exchange

The most important principle: Fairness, and the perception of fairness, is much more valuable than owning a large stake. Almost everything that can go wrong in a startup will go wrong, and one of the biggest things that can go wrong is huge, angry, shouting matches between the founders as to who worked harder, who owns more, whose idea was it anyway, etc.

Joel Spolsky (CEO @ Stack Exchange)
How much equity should a partner with a short-term commitment be entitled to? – Startups Stack Exchange

Here’s the principle. As your company grows, you tend to add people in “layers”. The top layer is the first founder or founders. The second layer is the first real employees. For many companies, each “layer” will be approximately one year long. By the time your company is big enough to sell to Google or go public or whatever, you probably have about 6 layers: the founders and roughly five layers of employees. Each successive layer is larger. Ther… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Employee Equity: How Much? – AVC

For your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula. Getting someone to join your dream before it is much of anything is an art not a science. And the amount of equity you need to grant to accomplish these hires is also an art and most certainly not a science.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Employee Equity: How Much? – AVC

Here are our default brackets:
Senior Team: 0.5x
Director Level: 0.25x
Key Functions: 0.1x
All Others: 0.05x

Then you multiply the employee’s base salary by the multiplier to get to a dollar value of equity. Let’s say your VP Product is making $175k per year. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. Let’s say a director level product person is making $125k. Then the dollar value of equity y… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures; Investor in Twitter, Kickstarter, Etsy…)
Employee Equity: Dilution – AVC

The typical dilution path for founders and other holders of employee equity goes like this:
1) Founders start company and own 100% of the business in founders stock
2) Founders issue 5-10% of the company to the early employees they hire. This can be done in options but is often done in the form of restricted stock. Sometimes they even use “”founders stock”” for these hires. Let’s use 7.5% for our rolling dilution calculation. At this point the f… (read more)

Ryan Allis (Chairman & Co-Founder @ Connect, Former CEO of iContact (sold $170M))
Ryan Allis’s 1,284 slides on how to win life, Part 2 – Business Insider