What is the Average Equity for Startup Employees?
Ready to be worth a billion dollars?
Well, an excellent way to get there is to keep most of the share as an entrepreneur or business owner. However, the business may not get very far if it’s just the co-founders with all the equity.
What’s the incentive for a talented prospective employee joining the business? Especially one that’s new, and could belly up if things don’t go according to plan.
After all, 90% of startups do fail, but mata can help you be part of that 10% by making the process of growing your business seem like a total breeze.
This is where a robust employee incentive plan is required so that top-talent is seriously considering joining the company.
A big part of this is if the employee is going to join a startup, and take on a good amount of risk, then they’d need some way of participating in the upside should the startup succeed and either get acquired or go public.
What’s the best way to offer a chance to snag this upside when the startup becomes a rocketship?
Equity.
Offering Equity to Employees
When it comes to attracting top talent, in addition to a base salary, it’s common to provide them with equity in the business. This can be done in many ways:
- Common or Restricted Stock can be issued with restrictions applied such as a vesting schedule which ensures that the employee only gets the equity based on a particular schedule such as if they stick around for four years to get 100% of the equity they were offered.
- Stock options or warrants can be provided, which gives the employee the right to purchase the stock of the business in the future for a pre-determined price.
- This can mean if the stock option is offered at $1, and the business does well in the future and the stock price on the market rises to $5. They can pocket that difference in profit when buying for $1 and selling it back on the market for $5.
Common Stock or Restricted Stock offers an employee immediate ownership of the business while a stock option or warrant is merely giving them the right to own the company at a predetermined time if the performance of the business.
Think of it as the former offer to an employee is letting them know they are a part-owner while the latter is a chance for them to get rich should the company succeed.
This can be important depending on which level of employee or talent caliber that’s being attracted.
Common Equity for Employees
So what is the average equity for startup employees that one should offer?
Equity can’t be looked at in isolation. The equity offered to an employee should be based on how it compares with the salary, bonuses, and benefits that are part of the offer too. Moreover, it should also factor in what competitors or the market is offering for a similar role, and finally, the specific value the employee may bring to the business.
Average Equity Offered by the Role
If one were to look at post-series A startups in Silicon Valley, the following equity offering is common if based on role:
- CEO: 5 – 10%
- COO/CMO/CTO: 2 – 5%
- VP of x: 1 – 2%
- Board Member or Key Advisor: 1%
- Director: 0.4 – 1.25%
- Lead Engineer: 0.5 – 1%
- Senior Engineer: 0.33 – 0.66%
- Manager or Jr. Engineer: 0.2 – 0.33%
This assumes the role was hired right after the round and the equity would be in the form of either stock options or restricted stock. The equity offered would follow a traditional 4-year vesting schedule and assumes the employees are paid a salary with other standard benefits.
How does this differ based on the funding round a startup is in?
If the startup just completed a seed round, then assume each of those equity values is inflated by 10% for all VP and above positions. If the startup just completed a series B, assume anything below C-suite is offered far less equity than what is offered at the end of a Series A round.
The true degree of adjustment based on different funding rounds will depend on the valuation the startup is measured at the end of each round.
Equity Offered by Employee #
Another way to look at the average startup equity offered to employees is by how recent of a hire they are in the business.
These would also follow a traditional 4-year vesting schedule and involve the use of restricted stock or stock options. The above however doesn’t account for the type of roles hired and can skew one’s perspective of the right equity to offer.
Our advice is to offer equity based on the value the employee will bring.
If the founding team (CEO and CTO) of a seed-funded startup needs a CMO to help lead marketing efforts. This means hiring experienced top-level talent is going to mean offering decent equity between 10 – 15%
On the flip side, if the founding team needs a Marketing Associate to help execute on marketing or growth efforts to help give the CEO some breathing room, then it may mean an equity offering of 0.5% to 1% is enough.
Takeaway
Offering equity is a case-by-case approach and varies based on the needs of the business, the stage it’s in, and future strategic direction. Always remember ownership is valuable and only give out equity methodically. The differential of 1% equity for a startup valued at a billion dollars is a lot!
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