How much equity should I give?
One of the big questions when sharing equity with your team is how much equity to give.
A quick Google search will show methods that involve calculations and equations to figure out the “perfect” amount of equity each person gets. For some examples of this, see the Wilson or Wealthfront Formulae.
Those methods are a useful way to standardise your approach, especially for larger companies as it might make it easier to get the necessary sign-off from relevant stakeholders just once, rather than per grant. However, each of these methods still involves some very subjective decisions, which brings you back to the original question of deciding how much equity to share amongst your team.
When we help business owners (like yourself) through the process, they find it helpful to start by looking at their equity from a higher vantage point before getting into the finer details. We’ll walk you through an example of this process below, and you can follow along with this calculator to see what the numbers can look like for your business.
Keep in mind that this is a general guide and not necessarily the perfect recipe for your company’s success. Ultimately, your pie is yours alone to slice. Another worthwhile caveat is that we are not getting into the details of choosing a share class in this article, as that is a bigger topic.
Table of contents
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The Starting Point
The first thing to understand is what you’re starting with, and who else is already expecting to be on the cap table:
- Current Shareholding
If arrangements for equity have already been made with partners, these should be taken into account in the “Current Shareholding” section of the calculator. This section should also include all the shares already in issue, though you can group shareholders if it’s easier.
The Broadest View
From there, decide how much of the total equity you and your partners are comfortable allocating for a share scheme. You don’t necessarily have to come up with an exact number, and clearly plans can change, but try to be as detailed as possible.
Here’s a generic example: Excluding co-founders, companies typically have a total share scheme pool of around 10-20%. Of this, depending on the nature of the business and its development path, up to 10% may be for early key hires (e.g. CTO, CMO, CFO), with 10% then earmarked for the rest of the future team.
Now that you have a slice set aside, think about how to cut it into individual pieces for the team. One part of this is to include a percentage that will be allocated to future hires.
Categorising Your Team
Think about the team you’re putting together and how their seniority and employment start date can play a part in structuring the equity. Here’s one way of categorising your team:
- Key Early Hires
- Senior Management
Who falls into each category, and how much should they get?
Here comes the inevitable decision-making moment in how much equity each group gets. From there, you can think about how many people are likely to fall into each category, and therefore how much each person is likely to be looking at.
Total of 10 - 70%+
This group is often not included in the “Option Scheme” total, given the large chunks of equity they are likely receiving. Nevertheless, they may well be receiving all or some of their share of the company via Options or Growth Shares, so we have included them here and in this calculator.
These people might be with you from day one, but this doesn't necessarily mean they will be equal shareholders. Their ownership depends on the amount of time and value each of them is willing to contribute, to what extent they’re receiving any income, and how much they actually deliver from their initial commitment.
Answering these questions and measuring contributions can be complex and ambiguous, which is why we created Agile Partnerships to allow you to clearly define the agreements, responsibilities, and objectives of co-founders.
2. Key Early Hires
Total of 5 - 10%
1 - 3% each
Although they are ‘hires’ rather than co-founders, they are crucial team members of the budding business and most likely taking a risk in joining you on your journey (and at a very early stage too). They will probably form the C-suite of the scaling business in the coming years, and as such you want to make sure they have plenty of skin in the game.
3. Senior Management
Total of 1 - 5%
0.5 - 1% each
These people will be joining the company over the first few years as the broader team takes shape. They’re joining a more mature, steady business, and might therefore be taking less of a risk than the key early hires. Nonetheless, they will be cornerstone individuals in the organisation.
Total of 5 - 10%
0.05 - 0.5% each
Although this might not look like much as a percentage, if the company grows as everyone hopes, that could be a significant payout later down the line. Regardless, owning a piece of the pie matters, and goes a long way with employee performance and engagement. Even the most junior employees will feel more valued knowing they have skin in the game.
For the most part, dilution is a law of nature like gravity and taxes. It is also nothing to be afraid of, but rather something to keep in mind as you plan future share and option grants. We have a comprehensive article on this, so we won’t go into too much detail here.
If you’re expecting investment in the short to medium term, and have a general idea of the amount of equity to set aside, think about whether you want some of those on the scheme or cap table to be holding their percentage before or after this investment.
Future rounds will eventually dilute everyone’s stake, but agreeing to give someone X% only to immediately dilute their share with an investment round that was already planned might send the wrong message (or worse). For this reason, we have included investors in the calculator.
The finer details
Once you’re determining a way to standardise the rollout of the scheme to all future hires, something like one of the formulae mentioned at the start becomes more relevant. You don’t need to decide this straight away as it’s usually not something companies implement until the team grows relatively large.
When it comes to granting your options, our team will help you design your option schemes to match your business goals. This includes considering a vesting schedule, criteria, exercise price, and exercise conditions. Have a look at this article to learn a bit more about the scheme design process.
The ‘Equity Sharing Calculator’ is a tool we’ve built for you to explore and work through any scenarios you might contemplate or wish to assess with your co-founders/team.
Equity, in whatever form it is offered, should ALWAYS be issued with a clear understanding and agreement of what’s to be delivered in exchange. Never allow equity to be issued just against a promise.