How much equity do I issue to my employees and contractors?

Takeaway: Setting employee compensation at startups is difficult. Using benchmarking tools like Carta Total Comp can help ballpark compensation for various roles and create a more standardized system of compensation across the company.

Determining how much equity to issue to employees and contractors at a startup can be a challenging task. While equity compensation can be a valuable tool for incentivizing employees and aligning their interests with those of the company, it's important to strike the right balance between equity and cash compensation.

Here are some key factors to consider when determining how much equity to issue to employees and contractors.

Role and responsibilities

The amount of equity awarded should be commensurate with the employee or contractor's role and responsibilities within the company. For example, a senior executive may be awarded more equity than a junior employee with less responsibility.

Market standards

It's important to be aware of market standards for equity compensation in your industry and location. This can help you determine what is a reasonable amount of equity to offer for a given role. Tools like Carta Total Comp can be a useful resource to determine what is market for a given position - ask your lawyer for this information.

Cash compensation

Equity compensation should be viewed as a complement to cash compensation, not a substitute. It's important to offer a competitive cash compensation package in addition to equity compensation. Some startups will provide employees with two options: they can choose between (i) a higher cash compensation and lower equity compensation or (ii) lower cash compensation and higher equity compensation.

Stage of the company

The stage of the company can also impact how much equity to issue. In the early stages of a startup, when cash flow may be limited, equity compensation may be a more important component of overall compensation. As the company grows and generates more revenue, cash compensation may become more important. Keep in mind that when equity compensation is issued at lower valuations (i.e., earlier in the company’s lifecycle), it is more valuable (and dilutive) than equity compensation issued when the valuation is higher.

Dilution

It's important to consider the potential dilutive impact of issuing equity. While equity compensation can be a valuable tool for attracting and retaining talent, too much dilution can have a negative impact on the company's overall value, particularly if the equity compensation was issued in the company’s early stages.

Conclusion

There is no one-size-fits-all answer to how much equity startups should issue to their employees and contractors. It's important to consider the role and responsibilities of the employee or contractor, market standards, cash compensation, stage of the company, and potential dilution. By striking the right balance between equity and cash compensation, startups can attract and retain the talent they need to succeed.