Reblog: Employee Equity: How Much – AVC

This may be the most popular AVC post of all time based on the amount of traffic it gets month after month after month. I think I may rewrite it at some point because while I still believe the basic ideas here are correct, some of the math has changed due to market pressures and it deserves a rewrite. With that caveat, here it is.——————————————–The most common comment in the long and complicated MBA Mondays series on Employee Equity is the question of how much equity should you grant when you make a hire. I am going to try to address that question in this post.First, a caveat. For your first key hires, three, five, maybe as much as ten, you will probably not be able to use any kind of formula. Getting someone to join your dream before it is much of anything is an art not a science. And the amount of equity you need to grant to accomplish these hires is also an art and most certainly not a science. However, a rule of thumb for those first few hires is that you will be granting them in terms of points of equity ie 1%, 2%, 5%, 10%. To be clear, these are hires we are talking about, not co-founders. Co-founders are an entirely different discussion and I am not talking about them in this post.Once you have assembled a core team that is operating the business, you need to move from art to science in terms of granting employee equity. And most importantly you need to move away from points of equity to the dollar value of equity. Giving out equity in terms of points is very expensive and you need to move away from it as soon as it is reasonable to do so.We have developed a formula that we like to use for this purpose. I got this formula from a big compensation consulting firm. We hired them to advise a company I was on the board of that was going public a long time ago. I’ve modified it in a few places to simplify it. But it is based on a common practive in compensation consulting. And it is based on the dollar value of equity.

via Reblog: Employee Equity: How Much – AVC.

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About Bob Warfield

Here's my bio: http://www.smoothspan.com/management.html
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