Guest author Scott Gerber is the founder of the Young Entrepreneur Council.
In an early-stage startup, you may not have much in the way of cash to offer new hires. While you’ll often hear advice about how to structure equity for technical hires, deciding how to compensate other key hires—from cofounders to sales staff—isn’t as clear-cut.
To help you figure it out, I asked founders from YEC how they figured out what to offer early-stage, nontechnical hires. Their best advice—from considerations to make to equations to use—is below.
1. Base It on the Number of Employees You Have
Early hires are more critical than late hires. Think of your company hires in terms of stages: 1–2 employees, 3–6, 7–15, 16–30, 31–60, 61–150, etc. The amount of equity an employee gets should go down with each stage, because the company is getting less risky to work for, and because you just can’t keep issuing large amounts of equity to everyone at the company. Here’s one system to follow: Employees 1-2 (cofounders) should split the company either 50/50, 67/33, 75/25, or some other reasonable amount. Employees 3-6 should get between 1 and 5 percent of the company in equity, while employees 7–15 should get 0.5–1 percent. Employees 16–30 should get between 0.25–0.5 percent, and so on. A great company to look to for guidance on this is Buffer, which opened up all its salary and equity calculations. —Mattan Griffel, One Month
2. Calculate Based on Your Capital Considerations
Assuming you’re starting with no capital, you’re going to grant pieces of your company in order to give incentives to early-stage employees. In my experience, sales and marketing is most often handled by stakeholders when there’s no capital. If sales staff is a requirement of your particular company, revenue-share models can be more conducive with the startup economy so you’re not forced to give away critical pieces of your business before seeking subsequent investment. —Blair Thomas, EMerchantBroker
3. Decide on What You Want Everyone to Know
We make all compensation, salary, and equity based on the expectation that everyone eventually finds out each other’s numbers. This means that people with similar positions and responsibilities should have the same compensation. Even if a candidate asks for lower equity than their peers, give them the same amount. When they find out that you gave them less equity than a peer, you’ll lose their trust. When we give out offers, we tell candidates that we don’t negotiate because what we offer is prioritizing fairness for the candidate and the rest of the team. New hires have been appreciative of this approach. —Nanxi Liu, Enplug
4. Use AngelList to Decide
AngelList is a great resource for determining early-stage compensation for non-founders. It shows you how much equity companies like yours in your geographical area are offering employees of various titles, and takes the guesswork out of the process. —Brennan White, Cortex
5. Start With an Option Pool
The best way to manage equity for key and strategic hires is through an option pool. Most option pools include total equity in the amount of 10–15 percent, which you’ll need to allocate based on projected hires over the next 24 to 36 months. Once you establish your intended list of hires, you can allocate up to 75 percent of the option pool (leaving wiggle room for negotiation). Generally speaking, technical hires should get more equity than nontechnical hires. However, you may want to break the “technical-hire” rule for superstar nontechnical hires, especially if the hire fills a needed executive or senior-level position. Once you think through your hiring, you’ll be in a better position to allocate your option pool. Note: setting up an option pool will also be helpful should you raise venture capital. —Kristopher Jones, LSEO.com
6. Tie It to Performance
Using equity in lieu of capital compensation until you are cash-flow positive is normal. The shares should be on a vesting schedule and should be tied to performance and agreed upon by both parties. —Lane Campbell, June
7. Keep a Vesting Period in Mind
In general, sales and marketing staff tend to get less equity than technical hires with the exception of nontechnical managers and executives. In my opinion, how much equity you give is less important than how the equity will vest. In general, most vesting periods are four years long, though people are experimenting with longer and shorter periods. This means that regardless of how much equity the non-technical hire is given, they will have to stay with the company (not get fired or quit) in order to achieve the full amount of equity given. For instance, if you provide a nontechnical hire with 0.5 percent equity over 4 years, the stock will vest in equal installments of 0.125 percent each year. Vesting periods are critical because they protect the company and create better alignment between the hire and his or her performance over time. —Obinna Ekezie, Wakanow.com
8. Base It on How Critical the Hire Is
It’s a two-step process. First, do some research to find the industry benchmark (try AngelList.) Second, you should think critically about how important this particular hire is going to be. For example, in enterprise companies, sales positions becomes very critical for the success of the company. If it is like that, you want to sweeten the deal further. Overall, good companies tend to be more generous with their stock options. —Ashu Dubey, 12 Labs
9. Use Equity to Keep Everyone in the Game
Compensating those on your team with the success of your business will add extra motivation and drive. Especially early on, you need all hands on deck and everyone moving in the same direction. This includes all aspects of your business, not just technical team members. I leveraged AngelList frequently to assess how much equity to give. Putting in a one-year cliff and a vesting schedule has been critical to keep the team motivated, and gives something to really celebrate when we hit those key milestones. —Kristi Zuhlke, KnowledgeHound
10. Quantify and Be Flexible
It’s a very tricky question with many different answers, depending on who you ask; there’s no single answer, but there are ways to tailor compensation to your company and industry that will serve you exponentially better than listening to general advice. Keep in mind several factors:
- How big is your equity compensation pool (15 percent, 20 percent, etc.)?
- How many hires will you be making in the next six months with the current equity comp pool, and what types of hires will these people be (low-level, high-level)?
- How early is this employee and what kind of salary is this employee getting relative to their industry?
- How important or unique is this employee compared to other hires?
11. Think in Terms of Dollars, Not Shares or Percentages
You should have a reasonable expectation of how much your business is worth today and might be worth in a year or two. You can also estimate what additional upside a new hire will need to either compensate for below market comp today, or take on the risk of joining a startup. For example, if the market for a sales person is $65,000 and commission is 10 percent, you can decide how much additional bonus per year they need to join your team ($25,000, $50,000, $100,000). Consider what that might grow into based on your valuation growth (2x, 5x, 10x) to get them to join. Then you can decide if it’s worth giving that up for what they bring in terms of sales growth or lead generation. —Avi Levine, Digital Professional Institute
12. Make Sure Total Compensation Hits Market Value
There are market rates established for all levels and roles. Target a compensation package within 20 percent of market rate. We’ve had success by offering a menu of three choices, which allows each candidate to choose their mix of cash and equity. Just remember that a well-rounded startup has strong technical and nontechnical people, so don’t treat anyone like a lower-class employee. —Aaron Schwartz, Modify Watches
13. Do the Math
Slicing up equity should come down to a math equation. Instead of reinventing the wheel, you should use math that other people have invented to figure it out. Y Combinator cofounder Paul Graham puts it together in this simple equation: 1/(1 – n). What it breaks down to is that if “n” is the equity you’re giving up, it’s worth it if it makes the company worth more than 1/(1 – n). Beyond that, I stick to the basics: Have a one-year cliff and four-year vesting for all equity employees. —John Rampton, Due