Posted in Business basics | by: Krystal Barghelame

Here’s What 10 Entrepreneurs Have to Say About Offering Employee Equity

If you’re a founder building a market-ready rocket ship, you probably need a team to launch you into orbit. But how do you attract the right crew to get you there?

As an entrepreneur, you probably know that offering equity to your employees helps create a team of business owners. And if you’ve done some research, you also know that structuring your equity package is super, super complicated. It’s both an art and a science; there are norms you should know, but ultimately, your equity offers have to align with your values as both founders and a company.

One of the best ways to figure out your equity approach is to learn from folks who faced those same decisions. So, we reached out to our favorite entrepreneur and investor buddies, both experienced and new, to share their ideas and wisdom. Here’s what they had to say when it comes to equity:


1. Even though it’s boring, do your homework

“It’s easy to feel that equity is mechanical and dry, but it’s important to understand the details. Your founding team should put in the effort to learn how various options work and, crucially, the long-term tax implications for your employees down the line. If your company is successful, this thoughtfulness will have a huge impact for your employees. It’s worth it to question many of the default equity set-ups, and instead make sure you set something up that is in line with your company’s philosophy.”

Ben Eidelson, Co-Founder and CEO of Mensch Lab


2. It’s both an art and a science

“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. However, a rule of thumb for those first few hires is that you will be granting them in terms of points of equity (i.e. 1%, 2%, 5%, 10%).”

Fred Wilson, Co-Founder of Union Square Ventures, “Employee Equity: How Much?”


3. Estimate the value of your equity with the formula: 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 should give up n% of your company if what you trade it for improves your average outcome enough that the (100 – n)% you have left is worth more than the whole company was before.”

Paul Graham, Co-Founder of Y Combinator, “The Equity Equation.”


4. Make a hiring plan

“Have a plan for how many people you plan to hire in the next 15 to 24 months and have an estimate for a low and high equity range for each role. This will prevent you from making one-off decisions case by case as you hire people.”

Lynn Perkins, CEO and Co-Founder of UrbanSitter


5. Reserve equity for key hires down the road

“It’s easy to start giving equity away on a first-come, first-serve basis without thinking about the CTO or CMO that’s on your to-hire list, and before you know it you’ve run through the employee option pool. It’s better to plan ahead, reserving equity for key hires and being mindful that you’ll want to hire some senior employees (who require significant chunks of stock options) down the line.”

Kevin Barenblat, Co-Founder of Fast Forward and Context Optional

 

employee stock options


6. Offer multiple compensation package options

“When you’re making a job offer, walk the candidate through a few different compensation packages with various mixes of salary, equity, bonuses, and benefits. You may not know what the candidate cares most about, and their feedback will help you learn more about their motivations. If someone wants more salary and less equity, they may be more short-term minded. If they opt for more equity, they could be big believers. Everyone’s calculus obviously changes based on their personal financial situation and stage of the company, but having a holistic discussion is a great way to find a flexible solution.”

Amir Malayery, Founder of Dapper and VP at Industry Ventures


7. Help your employees gain the upside of your company’s value

“When you start building an equity program, one thing to consider is what are some things you can do to make it easier for your employees to participate in the upside of the value they’re creating. For example, allowing early exercise of grants helps employees with the tax impact of vesting events. Recently some founders are also reviewing the standard “90 days to exercise” clause for exiting employees and increasing that timeframe to provide departing employees with more of a window to work out the financial implications of their ownership.”

Hunter Walk, Partner at Homebrew


8. Educate your team about equity

“Not everyone knows or understands it, and many people (even those in Silicon Valley) won’t necessarily value it. Make sure to explain simple yet esoteric things like ‘fully-diluted shares’ and liquidation preferences, but also more complicated concepts like 83(b) elections, 409A valuations and the difference between different kinds of stock options, if applicable.”

Rob Leathern, Founder and CEO of Optimal.com


9. Tell prospective employees their percentage of ownership

“Most startups do a bad job of helping employees think about the value of their options. At a minimum, any startup should tell a prospective employee what percentage of the company the equity grant represents (number of shares is meaningless). […] Employees should demand to know what percentage of the fully-diluted shares their stock options represent.”

Sam Altman, Co-Founder of Y Combinator, “Employee Equity.”


10. Build a team of owners

“As a founder, the right thing to do is to treat your employees like true owners of the business. At Gusto, this means offering employees the ability to early exercise so they can leverage the tax benefits. It also means that we allow folks to exercise up to 10 years after leaving the company, as long as they were a part of Gusto for at least two years. This way, employees aren’t constrained by “golden handcuffs” — they don’t stay simply to keep their stock options, and they’re not forced to spend money (which they may not have) exercising within three months of leaving. Our goal is to put the power and flexibility into the hands of our employees. The standard equity packages are slowly changing, and we’re excited to be part of this new wave of treating the employee as a true owner of the business.”

Joshua Reeves, Co-Founder and CEO of Gusto

 

Want a more in-depth dive into the universe of employee equity? Check out our free guide, where we provide a step-by-step overview to structuring equity, the tax implications of exercising, and more stock essentials.

About Krystal Barghelame

A writer on Gusto's content team, Krystal loves discovering and sharing the secrets of successful businesses with blossoming entrepreneurs. She also loves terrible pens. Er... puns.