I have gotten several questions recently from entrepreneurs looking to issue equity to employees: how much to offer, mechanics, etc. I have also gotten similar questions from potential employees on how to evaluate equity offers from startups. This is a complex topic with lots of nuances, but I’ll address a few high-level thoughts as well as link to some more detailed articles.

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Big picture value of equity

There are dreams in the startup world of having equity that is worth millions of dollars allowing you to buy fancy things, but the reality is that is highly unlikely in many scenarios. I love David Cummings’ simple framework of new car/new house/new life. Do some quick math based on how much equity you are issuing/receiving, what the startup could be worth (don’t forget to factor in dilution), and then see how much that equity could be worth.  Does that align with your expectations for the role/stage/risk involved?

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Vesting

Hiring the right people is challenging, and unfortunately many new hires do not work out. I strongly encourage having a vesting schedule (i.e. 4 years with a 1 year cliff) that protects the company in the event the new hire does not work out. Without this, I have seen difficult scenarios where meaningful portions of the equity pool are tied up in employees who are no longer working in the company.

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Financial/Tax implications

I am not an expert here and will not give specific advice, other than see some of the articles below and understand there can be big financial and tax implications based on how you setup and execute the options program. Make sure you understand the impact to your organization and to your employees.

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Here are links to some additional resources you may find helpful that have far more detail:

https://carta.com/learn/equity/stock-options/

https://carta.com/learn/startups/equity-management/409a-valuation/

https://avc.com/2018/04/the-employee-equity-project/

https://avc.com/2019/08/employee-equity-how-much-2/