For many founders, when it comes to determining equity grants and total compensation packages for early-stage employees can be challenging - particularly on a limited budget since there are numerous factors to consider.   

That said, creating fair and internally consistent compensation for early-stage team members is absolutely crucial to adding and retaining key members of your management team and employees.  

 When determining equity compensation there are a number of factors to consider. These factors include but are not limited to: 

• Stage of Business: Are you creating a new company from scratch?  Where is the business in terms of its early-stage lifecycle, i.e., idea formation/business planning & strategy conceptualization, product requirements, product in development, MVP developed, product live and in production, etc.  Early-stage companies typically allocate a larger percentage to the option pool to attract top talent, especially for key roles.  (Note: Always keep in mind that investors tend to invest in the management team as much as in the idea/business concept.) 

• Role/Job Title: The size of individual option grants typically varies based on the employee's role, level of responsibility, and the overall contribution they bring to the company. For example, senior hires like VPs and Directors usually receive larger grants than junior-level employees.  

Is the person a founding member of the management team or a key member of the core team? Are they senior, mid-level or junior? Senior hires tend to receive more substantial equity grants compared to junior-level hires. As a rule of thumb, if equity for a junior-level hire is 1x, a mid-level hire may be 5x, and a senior hire 10x.   

• Experience and Background: Someone with years of experience in your industry or in their area of expertise makes a difference. Also, someone coming from industry leading firms often tends to be more highly prized and rewarded than less experienced individuals or individuals from less recognizable businesses or universities. (Note this is not necessarily fair, nor ever a good indicator of an individual’s likely contribution to the business. That said, many investors tend to be superficial and often take a somewhat lazy approach of looking at credentials vs an individual’s performance or motivation.)  

• Timing:Your earliest hires deserve a larger slice of the equity pie. As you bring on subsequent team members over time, it’s common for their equity to significantly decrease over time.  

• Risk and Salary related to Funding.Equity amounts tend to vary based on funding status.  Is the business unfunded, partially funded, or fully funded? The more well-funded, the less risk, the more secure, and typically the closer salaries are to the market average. 

• Technical vs. Non-Technical:In early-stage companies technical hires often command larger equity packages compared to their non-technical counterparts – but it depends on the role and situation. For example, if the product is already built and you need to hire your first marketing or sales exec, then you’re likely to offer them more equity than your next product person/hire.    

• Vesting Period: Typically, you want to allocate stock options which vest over a period. This way you don’t just grant someone equity and the person can immediately or quickly leave the business with significant ownership stake in the business. Stock options typically vest on a straight-line basis over a period of time (e.g., 4 years for employees, but roughly 2 years for advisors or Board Members).  This approach ensures employees continue to contribute to the company while they gradually earn (vest) their stock options over time.  

• Industry Benchmarks: Typically, there are equity and compensation benchmarks based on the role/job title and sometimes based on the industry.  

• Fair Market Value of the stock: Many early-stage businesses do not yet have an established business valuation nor an established stock price unless they’re had a fixed price investment round or have done a formal 409A Valuation.  

However, they should have a number of authorized shares or units from when the business was formed and some imputed stock price.  If the business has a valuation and a current stock price the FMV of the stock is typically used as the strike price for stock options, thereby determining the price at which employees can purchase an sell shares after they have vested.  

To start building your equity budget, you’ll need to answer the following questions: 

• Equity to be set aside: How much equity do you need to set aside for your early employees? 

• Position Breakdown: What specific positions are you hiring for, broken down by role type and targeted equity amount. 

• Hiring Plan: How many people do you plan to hire between now and your next raise? This will be a rough estimate, but the more accurate you are here, the better you’ll understand your overall equity allocation and how much you plan to allocate/offer associated with each role. 

As mentioned, when allocating equity in early-stage businesses, there are numerous variables to consider, and one size or situation does not fit all. That said, to allocate equity for early hires for many years I have tended to use the following Rule of Thumb for Stock Option Percentage Grants table as a general guideline. 

Rule of Thumb for Stock Option Percentages  

Note1: Standard corporate stock options tend to vest over four years, but vest periods can vary. 

Note2: I wish I knew who to attribute this useful rule of thumb table to, however sadly I don’t know the source. But whoever it is, I’m personally very appreciative of the table and hope you find it useful as well.