Hi Operators ⚙️

Picture this…

You’ve got a killer candidate. Three rounds of interviews in, and you know they’re the one.

The team loves them, they’re on board with the mission, and it’s time to make an offer.

One issue - they’ve got a competing offer from FAANG. Monstrous base salary.

What are we going to do? How can we compete?

The answer, my friend, is upside. 

More specifically, offering equity as a portion of the compensation package.

Now, I’m sure you know how a stock grant works, but maybe you don’t understand the finer points of equity management.

Today, we'll help you secure top talent by leveraging your equity (instead of freaking out because you don't have a colossal budget).

⚙️ Here’s what we got going on today:

• How Big Should Your Equity Pool Be?  → Some insight from Y-Combinator

• How Much Equity for Each Employee? → Let’s talk specifics

• Dilution Solutions → Let’s avoid an “Andrew Garfield scenario”

Ready? Let’s dive in 👇

PS: Want even more actionable content for operations professionals? Connect with us on Linkedin

^{Together With Carta}
Trusted by 40,000+ Operators

For 40,000+ operators, Carta’s platform helps with equity management, compensation data, and liquidity.

For the month of July, Carta is offering a limited-time promotion of 25% off your cap table management for new customers. This offer goes up to 30% off if you bundle it with another Carta product, like Equity Advisory or Carta Total Compensation.

To get started, click on the button below, schedule a demo and mention the “July offer.”

^{Together With Vitally}
Looking to Boost ARR by 20%?

Ready to put your customer data to work…and get free AirPods? If you said yes, this message is for you.

Vitally's the all-in-one platform for modern CS teams - automate and scale strategies, processes, and workflows using your real-time customer data…but don’t just take our word for it.

G2 customers have repeatedly ranked Vitally #1 in Best Results for Fastest Time to ROI and Fastest Time to Go Live. Interested in learning why Vitally is trusted by 500+ leading B2B Customer Success teams?

Book your intro call today if you're a CS decision-maker at a B2B SaaS company with 20 - 1,000 employees.

Don’t influence CS? Connect us with the right people at your org, and we’ll still send you AirPods for the introduction once the demo call is held.

Operators Library

• LinkedIn reveals it’s top 46 equity management software picks. 

• Learn from this founder’s $125 million equity mistake. Gulp. 

• Sam Altman advocates for allocating 30-ish% of your equity to employees.

• What’s the impact of equity management on company culture? Read on.

• Learn the ins and outs of Incentive Stock Options (ISOs) for startups.

I. How Big Should Your Equity Pool Be?

Insight from Tim Brady

Let’s start with the basics. We need to set aside a pool of equity for your early employees. This is for your initial hires, but can also be created after a round of funding when you need to hire again. 

VCs typically insist on an established option pool before investing, so save yourself the future headache and establish one early.

But how large should this pool be? 

Y-Combinator says ~10-20% of total shares, and that’s a good benchmark.

 It will, of course, be variable based on a handful of factors:

• How much cash you have on hand: If you have more cash, you can offer bigger base salaries. As a result, equity may make up a smaller portion of total compensation packages.

• Hiring needs: Consider your hiring roadmap. If you plan to bring in a large number of new employees, particularly senior staff or executives, a larger equity pool will be necessary to accommodate these grants.

• Industry standards: Look at what other companies in your industry are offering. This can help you stay competitive and attract the best talent.

Ultimately, this is going to be more art than science, but it’s important to keep one anchoring piece of wisdom in mind:

Very few founders will say that they were too generous with the equity they gave their early employees.

Having skin in the game is great for all parties 🤝

Learn more: A guide to startup equity compensation

II. How Much Equity for Each Employee?

Insight from Holloway

Let’s talk specifics.

How much of that 10-20% should each employee receive based on their experience and role?

The loose consensus for what percentage you should offer for each position is below. 

These numbers are for a post-series A startup in Silicon Valley, but they’re a good place to start. 

The above would include restricted stock or stock options and a four-year vesting schedule. 

Equity offers will be lower than this for post-series B startups, but seed-funded startups may offer even higher percentages (with lower base salaries).

Just remember that these numbers are highly situational. 

We just thought it might be helpful to offer some well-sourced benchmarks 😀

Learn more: Search what other startups are offering their employees

III. Dilution Solutions

Insight from Carta

Finally, let’s cover the not-so-fun side of financing: dilution.

Everyone remembers that endlessly meme-able scene from The Social Network, right?

Let’s talk about why Andrew Garfield was pissed off.

Dilution occurs after a round of funding, an increase to your employee stock pool, or post IPO. 

When shares are granted to new investors, they aren’t taken from the existing pool, they’re created… ✨magically ✨.

Everyone keeps the same number of shares they had before, but each share now represents a smaller percentage of the whole pool. 

Just like that, the value of each share goes down (see the below image for an example).

Remember when I told you above that VC's usually require you to set aside an option pool for employees before they'll invest? 

Dilution is the reason. 

Once you issue their shares, even if you do more fundraising later on, the dilution doesn't affect them, only the previous shareholders 😬

So, how can we set ourselves (and, more importantly, our teams) up for success and mitigate future dilution? Here are a few paths:

• Don’t raise more than you need. Early money is more dilutive, so raising more than you need in the early stages will dilute every other shareholder MUCH more than in later rounds.

• Don’t create a bigger option pool than you need. We gave the figure of 10-20% early on, which is a good benchmark. An even better idea is constructing a well-thought-out hiring plan that forecasts exactly what amount of equity you plan to set aside so that you don’t overshoot.

• Read the fine print. The fundraising landscape has shifted a lot more in favor of investors. It’s worth investing in some sort of modeling tool to really chart out exactly what the future holds.

Make sure you understand exactly how you and your team will be diluted before taking on financing.

You’ll save yourself a headache, and maybe a busted laptop too (sorry Zuck!)

Learn more: Everything you need to know about share dilution and how to mitigate it

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