Equity · Hiring

How much equity do you give your first employee? Other incentives?


May 10th, 2016


I am in negotiations of bringing on the first employee, pre-revenue. We have met a few times, and she seems like a great fit.

That said, we both understand it may not work out, and she is okay with a vesting schedule (standard 4-year vesting schedule).

She wants to focus on marketing and soon business development (her main area of interest).

She says perhaps there could be milestones for incentive.

I have worked on the content portion part-time for 1.5 years and invested around $30,000. Each week I work about 25 hours on the site (still have a full-time job). She is able to commit 10 hours a week and can't put in money (or very little).

I would love to hear advice on what sort of equity I could offer and milestones. Would it make sense to include a % of business she brings in.

I also read a website varying opinions pertaining to first employee equity.

From Sam Altman of Y Combinator:

Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number 5 gets. Additionally, companies can now get more done with less people."

He also states that the default 4-year vesting with a 1-year cliff is not the best choice and proposes a 6-year vesting schedule with above market grants, arguing that it will help filter for employees that really believe in the company's mission.

Paul Graham has said this too:

You should give up n% of your company if what you trade it for improves your average outcome enough that the (100 - n)% you have left is worth more than the whole company was before."

Suppose that employee will work for you in return for 3% of your company. In this case, n is .03 and 1/(1 - n) is 1,031. If you believe that employee can improve your outcome for more than 3.1%, you should pull the trigger.

How do you determine this figure?

VentureHacks stated this:

There has been a heated discussion in the valley about founders vs. employees value. This discussions revolves one question: are founders 100-1000x more valuable than early employees? Should they keep almost 100% of the company while employee #1 only owns a few percent?

Their answer is yes, because at first, founders aren't fundable. Their business value is approximately $0, while employees start with stock options worth at least $100,000.

I am bombarded with so much information and just don't know what to make of it, what is fair (and how to explain my thought process) and how to provide incentives. Also, is there a different thought process if you bootstrap vs. raise money?

Any insight would be appreciated.

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Thomas Kaled Business Development Consultant @ thomas.kaled@gmail.com

May 10th, 2016

Equity vesting schedules are probably best constructed by Class (position) of employee rather than by each employee unless they are "Key" employees. It is the easiest way to administer such a program.

Discretionary grants of stock beyond vesting are problematic and should be avoided. 

Performance bonuses are typically cash and are structured to reward the behavior most beneficial to the Company.

Discretionary bonuses are just that, discretionary and can be granted by managers although I would suggest that some formula for granting them exists to protect the Company from an unscrupulous manager or inconsistent behavior.

Salary is just that, salary and is determined by what the market demands.

It's probably best not to tie a vesting schedule to episodic performance as liabilities exceed the benefits.

Shobhit Verma

May 10th, 2016

I will tell you what someone else told me and what ended up working out for some. There is no formula! The key is to make it work ... you should give whatever it takes to make them happy and productive. The "right split" alone will not magically make the startup successful. It is all about whether you have the right team and building that is a repeated trial and error game (unless you just graduated with 5 other friends who also believe in that idea, which is why you see so many successful teams consisting of recent grads)

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

May 10th, 2016

I think you have already done excellent analysis.  Paul Graham's analysis feels right to me. 

I also suggest you check out Buffer's open equity information for comparison - https://open.buffer.com/buffer-open-equity-formula/.

That said, your situation might not be a good fit for rules designed for people who are working full time for a start-up that may be funded and who may be earning cash compensation as well.    

In your situation, where neither of you are working full time, you might find something based on the presumed future value of your company and presumed value (or open market rate) of the services you are getting from your first employee might work better. 

In other words, if you think the market cost for a marketer working full time is $100K,  then working quarter time would be $25K / year.  And If you presume the value of your company is going to be worth $10M in 4 years, you get one quarter of one percent. ($25K / $10M = 0.0025%).  If she increases to full time, you might increase to one percent.  If you determine you have over estimated your valuation, you may want to adjust her stake by offering an additional set of options.  You could also tie these to specific milestones that you feel you can value better than her market rate.

If she is doing business development, you could also tie equity rewards to the amount of business closed (similar to a commission).

If you don't have a clear understanding of your valuation (which is probable given how early stage you are),   you both might be better offer with something that looks like convertible debt. In this model, she accrues deferrred compensation debt now for the work she does (either hourly rate, fixed price milestones, or commission), and it converts to shares at the same price (possibly with a discount for added risk) as the institutional investor pays when you raise funds or achieve some other valuation event.

Whatever you choose, both of you should be sure to talk with your lawyers and tax advisors as these early agreements are often flawed when not properly vetted and can have nasty tax implications you may not expect.