How much equity should you get as a startup employee?
How much equity should you get as an early startup employee? The answer is nuanced, and depends greatly on your situation. We’ll explore a few options and help you understand how to think about the problem to ultimately help you get the equity you deserve.
Unfortunately there’s no chart you can look at to easily know how much equity you should get as an early startup employee. There are some fundamentals that can help you understand how much you should ask for though.
1. The earlier the employee, the more equity they should get. This is due to the risk that a very early employee takes, relative to the risk that a later employee takes. Giving more equity to earlier employees is a way of providing a risk adjusted return to those who are taking a big gamble on the startup working out. Early employees will be expected to put in long hours in a chaotic and often unstructured work environment in which they have to wear many hats. A later employee, by comparison, will have a more defined job description and more normal working hours. The early employee is taking on a much high amount of risk that their job could go away, or not be able to pay their paycheck than a later employee that can pretty much rely on the company having some stability. If a company is pre-revenue and pre-funding, the amount of equity is usually much higher than a company with venture financing, or revenue. Again this is due to the much higher risk that the earlier employee is taking.
2. Consider how much of the total equity pool is left and how important your role is. Most companies set aside between 10% and 20% equity to be distributed among employees, including company leadership. The amount of equity each role gets will depend in large part on how senior it is, and how important to the mission of the company the role is. Many organizations are highly biased toward technical talent early on, so engineers and developers will end up with more equity than sales and marketing roles. The amount of equity assigned to a role plays a huge part in the over compensation calculation that you should do as an employee. A 0.001% equity grant in a very early stage company is pretty much meaningless, and so you should be receiving a salary that’s competitive with the market. However, if you’re getting a 3% equity grant, you’ll probably be expected to work for below market rate wages until the company is further along.
Below are a few rough ranges that can be commonly seen for early employees at startups. Again, if you’re very early, it may be a little higher, and if you’re joining a later stage company, it’ll likely be a little lower.
- Outside CEO: 5%
- Outside other C-level: 3-4%
- VP-level: 1-3%
- Senior-level Engineering / Software Development / Artificial Intelligence: 0.5% – 3%
- Director / Manager-level: 0.25% – 1.5%
- Junior-level Engineering / Software Development / Artificial Intelligence: 0.1% – 1%
- Other Junior-level employees: 0% – 0.25%
These ranges are just estimates, and if you’re not being offered equity around that, consider what the reasons might be. You don’t want to join a startup and take a lot of employment risk unless you’re being fairly compensated for it. You also don’t want to be overly greedy and demand an equity grant that’s not reasonable.
There are so many factors besides the equity to consider when joining a startup. You’ll be in close quarters under high stress with the people in the startup, so make sure you like them first. Then make sure you’re making at least enough salary to cover your burn rate, and then think about how much equity would be fair.
Co-founders usually split the equity less the equity pool for employees, though sometimes the employee pool is added later. For an example, let’s consider the following:
- A company has two co-founders, who start the company and have 50% each in equity.
- The founders get venture capital financing for the company, and sell 20% of the company to the investors.
- In that financing, an employee equity pool of 15% is created.
- The co-founders now have 32.5% of the company, the investor has 20%, and there’s a 15% pool for employees.
- The co-founders might then hire a COO, who they give a 3% grant from the option pool, a VP of marketing who they give a 1.5% grant, and Director of Software Development who also gets 1.5%. Now there’s only 9% left in the option pool.
- If the founders then need to hire several engineers, several sales people and some operations staff, it’s easy to see how quickly a 15% equity pool can go.
Lastly, most startups fail. You have limited years in your career and if you’re going the startup route, make sure you’re making good decisions about the companies you join. If you’re not sure if a company has a better than fair shot of making a big splash, maybe it’s not worth spending your time there. Ask mentors, investors, and peers for an honest assessment of the total compensation, and the company as a whole. Generosity counts too – you deserve to be well compensated along with the rest of the company if the startup becomes a success. If you don’t think you’re being offered a fair deal, find a startup that will. Good founders are generous and will understand how motivating equity is for their early employees.