The Importance of Employee Equity

You’ve worked from inception to birth and now your company is evolving. You might be bringing on co-founders, senior level team members and employees. You want everyone to be aligned to and share in the success of the business, but how do you determine how much equity to give everyone? The objective of employee equity is to make the first employees sensitive to feel an emotional ownership with your/your company’s great idea, its gripping product and the organization you are asking them to help grow. The percentage equity a hire gets depends on factors such as domain expertise, how early he joins (if he joins earlier, there is more risk and less stock), how critical the person is to the company and its funding, experience with associated ventures, whether or not he is replaceable, and connections. An equity premium may be considered if the employee is irreplaceable.

The percentage of equity an employee gets over time would gradually come down as more investors join and the company has to issue more stock (dilution). If, for example, an employee started off with 5 percent of equity, followed by which the company received two rounds of funding, the employee’s stock may be reduced to two-thirds or even half the original percentage for each funding round. Here’s a reality check. The early staff of a pre-funded startup that ultimately raises some rounds of capital can expect to endure considerable dilution, if the outcome is positive. If the outcome is less than positive, considering preferences, the employee may have to expect nothing more than what’s necessary to keep them on the job, if that’s required at the acquiring company.