Early Employee Equity?

Thank you so much guys. Really some great and detailed responses here. This gives me a little boost on my thoughts for the same now. Appreciated!

There is no easy way to determine this Paxshal. For each employee's it can vary anywhere between 0.1 % - 5%. It depends on the seniority, role and how do you see the person in the company 5 years down the line. As a general advise, be super generous in equity allocation. A solid team is what one needs to build a startup.

We use a simple combination of factors, depending on the stage of the business and what the founders agree on. When the business is at it's infant stage and there is no risk, we tend to give employees a large equity. This is because the task is to hire employees, get them to put in their blood, sweat and equity, and then sell the business. In our approach, we don't want founders to give up a large proportion of the company while they are still working on the product. It doesn't make sense to do so. Once the business has been established, then the equity given cannot be reduced.

It is important to not just allocate equity in equal amounts to the early employees, but to allocate the right type of equity according to their contribution. This issue is further compounded by the fact that equity is fluid and founders can use it in any number of ways. I think the best way to tackle this problem is to first have a discussion with the prospective employee and get their views on the equity they should receive.

That's an interesting topic. I'm not a founder but an early employee right now, so it's definitely an interesting discussion to me:) But I used to work in 3 publicly traded companies which had a program like this: - an employee, based on the seniority and performance, could get options to purchase equity at 1$ price per stock with equivalent of $ amount - for example, 5,000 $ options bonus would be calculated on the price of stocks at the time of the payment, to ensure that an employee gets non less than 5,000$ - so it's not stock, it's options given to an employee, who then can use it to buy stock or sell the options, and then sell or keep stock. - these options would be paid in 5 chunks, on quarterly basis. For example, for the example with 5k$, they would be paid in 5 portions, the equivalent of 1k per quarter. If employee leaves the company, he is not entitled to get the rest, so they have to employed during the time of scheduled payment in order to receive it. - there is vesting period rule. - as the employee's grade grows, the easier it is to make equity. For example, the lowest grade don't give the right to get equity at all. Starting from Senior Individual Contributor's level or Junior Management, you start getting equity for the highest possible ranking on the performance review (like A+). But when your grade grows, you can get the same amount of equity for a lower rating, like A, B, C rating - depending on your grade. For example, a super senior manager will get $5,000 for a very poor, but acceptable performance (like C, getting D means that you're a candidate for termination). When for a less senior emlpoyee, to get $5,000 equivalent in equity requires to get A or A+ on the review. This program was focused on employee retention and worked really well. Because once you're rewarded the equity, in order to get it, you need 5 quarters - 1,25 years to get what you deserve in full. During this 1,25 years, you will have at least 2 more performance reviews (2 per 6 months). Chances are that during those 2 reviews, you will be entitled to more equity. So, it's an ever running payment from you, 1,25 years in future. So, the farther you go, the more you lose when quitting, because those equity options accumulate pretty quickly, along with the salary growth, grade growth. The con of this system is that when a senior employee decides to quit, they start working without worrying about their next reviews. They do the bare minimum to avoid getting fired, but work with no enthusiasm, almost sabotaging the overall performance of the company. And the biggest problem is that the higher the role in the company, the more of this sabotage you see when the employee has already decided to leave and just spending this 1,25 years not worrying about the work, just worrying about getting the full pay. And when the top level managers leaves immediately to join another company, you can safely assume that he or she received an insane sign-up bonus to cover these equity losses.

The bigger the gap between the salary you can afford and the market rate, the more equity you may want to offer to make a compelling offer. Whether you want to learn about personal finance or trade Stocks, Currencies, Commodities and Indices Investor Money will help you.