Tim Brady - How Much Equity Should I Give My First Employees?

[Music]

How much equity should you give your first set of employees? This is more art than science. Unfortunately, there's no chart I can point you to where you can look up the number of employees and experience and get an exact figure. That's not how it works. What I can do is give you a couple of rules of thumb that will help you think it through.

The first one, which is obvious but worth saying anyways, is that early employees should get more equity than employees that join later. This is really for two reasons. One, they're taking a bigger risk joining your small startup, whose future is very uncertain. And second, they're going to be working their tails off in probably what's certain to be a pretty hectic environment. So they should be compensated for both that risk and that effort. People that join later, after you're profitable or once you're well funded, aren't taking that big of a risk, and they're likely walking into an environment that's a little more structured than early on. So suffice to say, the first employee should get more equity than the 20th employee, who should get more than the hundredth employee.

The second rule of thumb is that startups traditionally set aside between 10% and 20% of their equity for incentivizing their employees. If you raise money from a venture capitalist, they'll insist on you creating this pool of equity before they invest in you. Now, 10% on the low side and 20% on the high side of that pool might seem like a lot, but it goes pretty quickly, especially when you start thinking about the number of people you're going to need to bring in to help you grow your business. If you have to bring in an outside CEO, that person would traditionally get roughly 5% of the company; an outside CTO or COO would get roughly 3%. So, as you can see, it adds up pretty quick.

Before you begin distributing equity to anyone, even your first employee, you should think through how many people you need to bring in, who they are, and what you think you'll use from an equity standpoint to compensate them. Only then can you begin distributing.

Now, the first employee traditionally gets between 1% and 2%. That person, at least for a traditional Silicon Valley startup, is usually an engineer. If you go online, you'll see ranges anywhere as low as half a percent all the way to, you know, 3%. Now, there are a couple of considerations when kind of setting that range.

The first is how much cash do you have on hand? Right when you're starting a startup, cash is a scarce commodity, and sometimes it makes a whole lot of sense to pay a little bit less in salary in exchange for a little bit more equity. Now, not every employee or potential employee can make that exchange, but it's one that's worth considering and having a conversation about.

Now, the second consideration is how much does that potential employee value equity? You know, some people are more conservative by nature, and they value kind of the surety of a salary versus the uncertainty of equity. You know, and your job is to bring someone on board and keep them motivated. So use the tools that motivate them, and in this circumstance, maybe kind of use the lower end of the equity and the higher end of salary when compensating that person.

Lastly, just remember the vast majority of startups fail, and only a very, very small percentage become big financial successes. So I encourage you, when thinking about equity, to don't think of it as a fixed pie which is meant to be divided, but rather as a tool that’s going to increase your chances or your likelihood of being one of those few big financial successes. It’s in your best interest to make sure that the early employees have a really strong sense of ownership of the company. You're going to be working with them shoulder to shoulder for really long hours, right? And they're going to play a really large role in determining the outcome of your company.

I've worked in Silicon Valley for 30 years now, and I've yet to talk to a successful entrepreneur who said that they were too generous with their early employees. Good luck building your...