Access to a business's start-up employee equity pool can be one of the main points of attraction of working in a start-up. Giving employees access to equity can help you attract the best of the best. This is why we've compiled this short guide to giving equity to key employees and start-up equity benefits for you and your business.
Equity options - explained
Equity options give your staff members the right to buy shares at a certain price point. They themselves are not shares of stock or stock options. Employees that get into a startup company early can then make enormous profits once that company becomes a big player and is sold or goes public.
Advantages for employers
You might be wondering what the advantages of giving out company equity are for you as an employer. First and foremost, the opportunity to get startup equity will attract talent, even if you cannot pay potential future employees a significant salary. Having an equity option also tends to make your team members work harder because the prospect of big equity compensation is on the horizon.
Creating a start-up employee equity pool
The first of the strategic business decisions concerning your equity options is the size of the employee option pool, i.e., the portion of your company’s equity to be given to employees. Common practice is for companies to reserve c. 10% of their total equity for this. However, this also depends on your strategic business direction. In the next step, you have to determine how much equity each employee is going to receive. It is common for companies to grant bigger equities to early-stage employees and more senior employees. A relatively standard share would be for the average equity for early and senior staff members to be between c. 0.8% and c. 2.5%. However, these are just common percentages - at the end of the day, it is up to you as the business owner.
How to distribute equity in your team
There are two routes you can go down with giving out equity options: Only give it out to early employees and key employees or give equity options to every employee. Should you decide on the latter, hiring a new staff member will always be a significant investment for your company. This does mean your equity pool will need to be relatively big which means you inherently have less control.