Equity for early employees

Ankit is finally ready to hire employees for his brand-new startup. But he has no idea what to do for compensation.

  • Does he give equity? How much equity?
  • Does he offer them a market-rate salary? What if he doesn’t have much money yet?
  • What’s considered normal with other early-stage startups?

When I asked Elizabeth Yin, one of the GPs at Hustle Fund these questions, she surprised me by saying:

“Tam, there are no compensation norms.”

Elizabeth has seen everything from giving early employees no equity to giving employee #1s near-founder level equity.

But what is more common? Are there any best practices?

Elizabeth’s take: Think about equity as a counterbalance to the risk of your company.

If that sentence confuses you, don’t worry. We’re gonna break it down right now.

If you haven’t raised any money…

and you’re hiring your 1st employee with a teeny tiny salary ($0-10k), your first employee is basically a co-founder. And their equity should be closer to a co-founder level.

Elizabeth has seen a friend of hers give their employee #1

  1. 10% of the business (vested over 4 years)
  2. Housing
  3. No salary

The employee is taking on more risk and deserves more equity.

If you have raised money…

and you’re paying employee #1 near market rate, Elizabeth has seen founders give 1-5% equity (with vesting).

So if you’ve raised money and can pay near market rate (rare for early-stage companies), you can afford to offer less equity.

Because that employee is taking on limited risk and suffers no real loss in earnings. 

Your first 5 employees

Employee #2 and employee #1 are in a similar boat because they often start around the same time.

But after you complete your next raise or generate more revenue, the risk to join the company decreases. 

So you can pay the next few employees more cash and less equity.

Common packages for employees #3-5 are closer to 0.1-0.5% equity. It can be quite a big drop compared to 1-5% for employees #1-2.

Your first 15 employees

If you raise again, equity can drop by another order of magnitude. Here’s what the equity split can look like as more people join the team.

  • Co-founder: 30%
  • Employee #1: 3%
  • Employee #5: 0.3%
  • Employee #15: 0.03%

So if you’re employee #15 at a startup that sells for $10m, you’re not going to make a lot of money.

But being employee #15 is still pretty sweet. They gain experience on someone else's dime and have no real headaches. Even though there is a HUGE drop in equity, it can still be a win-win situation.

What’s the takeaway here?

While there are no compensation norms, it’s helpful to think about equity as a counterbalance to the risk of your company.

If employee #1 is sacrificing a lot to join your super early-stage startup, equity balances their risk.

If your company is in a great position and offers a competitive comp package, then it's more like a "regular job.