The Complete Guide to Startup Equity Compensation

# The Complete Guide to Startup Equity Compensation

Equity compensation is one of the most powerful tools in a startup's hiring arsenal. It aligns incentives, attracts talent you couldn't otherwise afford, and creates shared ownership in success. But get it wrong, and you'll either give away too much of your company or fail to attract the talent you need.

Understanding the Basics

### Types of Equity

**Stock Options (ISOs and NSOs)** The most common form of startup equity. Employees get the right to purchase shares at a set price (strike price) in the future.

**Restricted Stock Units (RSUs)** Actual shares granted to employees, typically vesting over time. More common at later stages.

**Restricted Stock** Actual shares purchased upfront, often at a discount. Common for very early employees.

How Much Equity to Give

### By Role and Stage

**Seed Stage:** - First engineer: 1-2% - First business hire: 0.5-1% - Early employees (#2-5): 0.25-1%

**Series A:** - VP/Director: 0.5-1% - Senior IC: 0.1-0.25% - Mid-level: 0.05-0.1%

**Series B+:** - VP: 0.25-0.5% - Director: 0.1-0.25% - Senior IC: 0.05-0.1%

### Factors That Affect Equity Grants

- Seniority and impact - Cash compensation trade-off - Market rates for the role - Company stage and risk - Candidate's alternatives

Vesting Schedules

### Standard Vesting 4-year vesting with a 1-year cliff is industry standard. This means: - 25% vests after year 1 - Remaining 75% vests monthly over years 2-4

### Variations - 3-year vesting (more aggressive) - 5-year vesting (more retention-focused) - Back-weighted vesting (like Amazon's model)

Strike Price and 409A Valuations

The strike price is what employees pay to exercise their options. It's set by a 409A valuation, an independent assessment of your company's fair market value.

**Key points:** - Get a new 409A after each funding round - Lower strike price = more valuable options - Strike price must be at least FMV at grant time

Explaining Equity to Candidates

Most candidates don't understand equity. Help them by explaining: - Number of shares AND percentage of company - Current valuation and potential outcomes - Vesting schedule and cliff - Exercise window after leaving

Common Mistakes

1. **Being too generous early**: You have limited equity. Preserve it. 2. **Being too stingy later**: Market rates exist for a reason. 3. **Not explaining equity well**: Candidates who don't understand it don't value it. 4. **Ignoring exercise windows**: Extended exercise windows are increasingly expected.

Equity is a powerful tool when used correctly. Be thoughtful, be transparent, and remember that the goal is to create alignment between employee success and company success.