As a startup founder, equity is the most valuable thing you can offer potential employees. It allows them to become stakeholders in the company’s success, aligning their incentives with the long-term goals of the startup. However, many founders need help determining how much equity to offer their early employees. This article will explore eight factors to help you make informed decisions about equity grants.
Eight Factors To Consider When Determining Equity Grants
Role Type
Different roles within a startup come with varying expectations. Engineers, for example, often have a higher equity value than marketing managers or other non-technical positions. This is because engineers typically have a deep understanding of the potential value and impact their work can have on the company’s success. On the other hand, roles that are harder to recruit for, such as data scientists or experienced software engineers, have more leverage when it comes to demanding higher equity grants. Startups often compete with established companies for top talent in these roles, and offering a more substantial equity stake can help tip the scale in their favour.
It’s also worth noting that candidates who make commissions, such as salespeople or business development managers, may not have the same expectations with equity grants. Their compensation structure already includes a performance-based component, so they may emphasize less equity. However, tailoring your equity offers to ensure they align with their expectations and market standards is important.
Employee Number
The order in which employees join a startup can significantly impact their equity grants. The first non-founder employee who leaps at the chance to join a startup often takes on considerable risk. They are committing themselves to a relatively unknown entity, and their dedication and belief in the company’s vision can be invaluable during the early stages.
As the startup grows and more employees join, subsequent hires may perceive less risk as the company becomes more established. While their contributions are still valuable, their risk level may be perceived as lower. This can impact their expectations regarding equity grants. Founders must recognize the additional risk that early employees take and reward them accordingly to foster loyalty, motivation, and a sense of ownership.
Role Importance
The value of a particular role can vary depending on the business and the startup’s unique needs, and that’s because not all roles within a startup carry the same level of importance or impact. For example, engineers may play a critical role in designing and building the product in a startup focused on developing a product, such as a physical consumer good. However, engineers will be even more vital if the startup is in the AI infrastructure space, as the product relies heavily on their expertise.
As a founder, you need to assess the relative importance of each role within its specific startup context. Though it’s essential to compensate employees fairly, overpaying for less critical roles will put unnecessary strain on the company’s equity pool. Evaluating each role’s value and aligning compensation accordingly will help founders balance attracting top talent and optimizing their equity allocation. Sifted gives more insight into the typical equity percentages that employees can expect.
Candidate Seniority
When considering equity grants, it’s advisable to look beyond the immediate needs and assess the long-term potential of candidates. Some candidates may have the qualities and skills to become leaders within your team or even manage an entire organization. Identifying these candidates early on and incentivizing them to stay long-term can be crucial for the startup’s growth and stability.
According to Techcrunch, timing triumphs over seniority and experience. “The early team you put together would definitely get a lot more stock than later employees, even if some of the later employees are more experienced than the early employees.” Offering a higher equity grant to these candidates with the potential to become leaders can be a powerful motivator. It encourages them to commit to the startup’s long-term vision and creates a sense of ownership and accountability, aligning their interests with the company’s success so founders can foster loyalty and build a strong foundation for future growth.
However, it’s important to evaluate early candidate seniority and experience carefully and consider their track record, skills, and growth potential. It’s a delicate balance that requires thoughtful consideration of each candidate’s unique attributes.
Location
Equity grant norms and expectations vary across countries and regions. Candidates from different parts of the world may have different perspectives on the value of equity and their willingness to compromise on cash compensation in favour of equity. Founders need to consider these variations when putting together an offer for a candidate.
To gain insights into the equity grant norms in a candidate’s home market, founders can utilize tools like Pave or consult with professionals with global compensation practice experience. Understanding the candidate’s expectations and the prevailing standards in their location can help founders tailor their equity offers accordingly. By doing so, they can strike a fair balance with the candidate and align it with the startup’s overall equity allocation strategy.
Develop a Framework
It can be beneficial for founders to develop a framework or guideline for determining equity allocation. The framework can provide a reference point and ensure that equity grants are fair and in line with the startup’s goals. One approach to developing a framework is to consider whether the startup wants to offer equity grants at the 50th percentile of the market or aim for higher or lower benchmarks. Suppose the startup offers grants higher than the market average. In that case, founders can sell candidates on the value of the equity, emphasizing the potential upside and the opportunity to become a true stakeholder in the company’s success.
On the other hand, if the startup offers grants lower than the market average, founders can focus on selling candidates on the unique learning and growth opportunities available within the startup. The approach will vary depending on the startup’s specific circumstances and goals. The key is to be consistent and transparent in communicating the rationale behind the equity grants to candidates.
Candidate Quality
Founders should prioritize securing top performers who can significantly impact the company’s trajectory when building their early team. Exceptional candidates, often called “rock stars,” possess unique skills, experience, or qualities that can change the game for a startup. These candidates have the potential to bring expertise, innovation, and fresh perspectives that can propel the company forward. In such cases, founders should be willing to pay up and offer higher equity grants to secure their talents. Negotiating in good faith is essential during these discussions. However, founders should also be mindful not to hold onto equity just for the sake of it. Recognizing the potential value that exceptional candidates bring and being willing to adjust equity allocations accordingly can be a strategic move that positions the startup for success.
Cash and Other Considerations
While equity is a valuable component of an offer, it’s not the only factor that candidates consider. Some candidates may have unique circumstances or personal financial commitments that require higher cash compensation. In such cases, founders can leverage the equity component of the offer as a negotiating tool, highlighting the potential value and upside of equity and demonstrating to candidates that it can be a meaningful addition to their compensation package. Carta advises founders to engage in transparent discussions to understand candidates’ circumstances and find a balance that meets their financial needs and aligns with the startup’s equity allocation strategy.
Optimizing for employees who understand the value of equity and appreciate its potential can create a strong and motivated team, while founders can attract and retain top talent by fostering a culture where employees see equity as a long-term investment and a reflection of their contribution to the company’s success.
In Conclusion
Kinfolk is committed to supporting founders throughout their entrepreneurial journey. We believe that by offering guidance on equity allocation, we can contribute to building strong, motivated teams and fostering a culture of long-term alignment and success. Equity is a valuable asset for startup founders to offer early employees, and determining equity grants for early employees is vital. As a founder, the above considerations will help you make informed decisions about equity grants and strike a balance between attracting top talent and maintaining fairness.
When you understand candidates’ unique expectations and circumstances and leverage equity as a negotiation tool, it will lead to successful outcomes for your startup. Startups thrive on the contributions of their early employees, and by offering equitable and compelling opportunities, founders can build a strong foundation for long-term success. If you are an African startup founder seeking collaboration with investors, send us a message.