Create a 10-20% equity pool before your first fundraise. Grant stock options with a standard 4-year vest and 1-year cliff to align incentives. Use our benchmarks to allocate equity fairly to advisors, employees, and executives, and be transparent about the potential risks and rewards.
Key takeaways
- Set up your equity plan *before* raising your first round to avoid excess dilution.
- Budget 10-20% for your employee option pool, starting smaller at pre-seed (10-12%).
- Use a standard 4-year vesting schedule with a 1-year cliff on all grants.
- Allocate equity based on role and risk: 0.1-0.5% for advisors, 0.5-1.5% for first hires, 1-5% for VPs.
- When making an offer, communicate both the number of options and the percentage ownership it represents.
- Consult a startup-savvy lawyer; don't use templates or handshake deals for equity.
''' Stop Thinking About Equity as a Perk. Start Using It as a Weapon. You need to recruit a world-class team with near-zero cash. This is the central tension of an early-stage startup. Your equity incentive plan (EIP) is the tool that solves it. It lets you trade a small slice of future upside for the talent you need right now. But a poorly structured plan creates more problems than it solves — excessive founder dilution, an inability to hire senior talent later, and major red flags for investors. This guide provides the tactical specifics to get it right from day one. The Anatomy of a Startup Equity Plan An EIP is just a formal legal structure for granting ownership to people who aren'''t founders or investors. It’s what allows you to grant stock options (or other types of equity) to employees, advisors, and consultants. Every professional investor will expect you to have one. It boils down to a few key components you must decide on: The Option Pool: The total number of shares you reserve for future grants. This is your equity "budget." Grant Types: Typically Incentive Stock Options (ISOs) for U.S. employees (better tax treatment) and Non-Qualified Stock Options (NSOs) for advisors, contractors, and international employees. Vesting Schedule: The timeline over which a person earns their equity. This is your primary defense against someone joining, getting stock, and leaving a few months later. Strike Price: The price per share an employee will pay to "exercise" their options. This is determined by a 409A valuation, a formal appraisal of your company'''s Fair Market Value (FMV). The #1 Mistake: Getting the Option Pool Timing Wrong The single biggest mistake founders make is not creating the employee stock option pool (ESOP or option pool) before their first priced fundraise. Investors will insist you have one. If you create it after the deal closes, it dilutes everyone, including your new investors. No investor wants that. Instead, they will insist the pool be…
Frequently asked questions
- How big should my employee option pool be?
- Start with 10-12% for a pre-seed round. Most seed investors will expect a 15-20% pool to be established for the round, which you should factor into your pre-money valuation to manage your own dilution.
- What is a standard vesting schedule?
- The standard is a 4-year vesting period with a 1-year 'cliff.' An employee earns 25% of their grant after one year, and the rest vests monthly over the next three years.
- What's the difference between stock options and RSUs?
- Stock options give an employee the *right to buy* stock at a fixed price (the strike price). RSUs are a *promise to grant* stock in the future, typically used by later-stage companies where the stock has a high and clear value.
- Do founders need to have their stock vest?
- Yes. Investors will almost always require founders to put their own shares on a vesting schedule, typically 4 years with a 1-year cliff. This ensures the founders are committed for the long term.
- How much equity should I give my first engineer?
- For a very early, pre-product hire (first 1-5 employees), an offer of 0.5% to 1.5% is a common range, paired with a below-market salary. This rewards them for taking a significant risk on your vision.
