Very passionate about this question as I've found in my time in Silicon Valley and Austin, TX that local ecosystems deal with equity very differently. Some consider equity ownership, some consider it merely a form of compensation. Some think of dealing it is as fostering loss of control, others expect you deal with equity as it implies your passion for a team, shared contribution and wealth creation.
Bottom line, I think you need to think of equity in three ways and the third is that which people least frequently consider:
- Value of the equity
- Likelihood of outcome: equity is effectively worthless without an IPO or acquisition unless you are the majority shareholders
- When does it cliff and how does it vest: No, you don't need to (shouldn't vest 1 / 4)
- Message that it sends to the employee, partner, investor
Equity establishes commitment, trust, and intent. I like to encourage that founders work through those questions backward rather than 1 - 3 as is typically done. Why? First consider the message you want to send to everyone involved. Do you share in the wealth and decisions in the business? Are you willing/able to let go of ownership for the sake of building a team that is rewarded? What do you want your investors to hear? That you control the company or that you have a team of folks invested in it's success?
There is NO right answer in that regard. The ideal answer is that in which you believe and commit.
Our second question, working backward, is about cliff and vesting. Appreciate that you are still sending a message. 1 year cliff and a 4 year vests essentially says that we treat you no differently than a regular employee (as this is standard). You can cliff earlier, later, and vest more quickly or slowly; each of those considerations sending a message about trust, expectation, and commitment. Consider that it speaks VOLUMES when you grant someone equity immediately vs. making them work for you for a year before they get anything.
Then you ask the third question... given how you want to communicate the impact of equity, is it actually going to be worth anything? This is a critical question as most founders don't appreciate that unless a company is going to be acquired for hundreds of millions of dollars, equity isn't worth much to those left over after investors, debt, etc. get their share first. So it is realistic that you will have such an outcome? To what extent is it likely better or worse than you hope?
Now what's it worth. What's it worth today and in the future? How does this co-founder / partner change future value and likelihood of that value being realized?
Only after answering all of those questions can you determine how much they should get as you can then consider the grant as clearly as compensation. Given the amount of work they do and their time committed, you'd pay them X which means they'd get Y in equity.
Quite a bit more perspective here: