- Equity Formula Calculator
- How to set equity in the compensation planning process
- Why employee equity matters
- How to create an equity formula
- What’s the right equity-to-salary ratio?
- Step 1: Fill out your compensation rubric for different roles
- Step 2: If necessary, adjust role-based compensation
- Step 3: Adjust valuation to reflect employee risk stages
- Step 4: Add upcoming hires and their choice
- How to adjust the equity formula as the company grows
- What are principles for setting employee equity View more
OUR RESEARCH PROCESS
We reviewed 100-plus articles and conducted multiple interviews with compensation specialists, heads of talent, and leaders in recruiting.
IF YOU REMEMBER NOTHING ELSE
- Startup equity makes up for what an employee could have earned at an enterprise company.
- For the first few hires, equity amounts range from 1% to as high as 10% of the company.
- As soon as possible, transition to awarding equity through a compensation formula based on the employee's role, risk preference, and the company's valuation.
- Talk about equity in terms of dollar value (not percentage of the company) to encourage employees to build value rather than protect ownership.
- After two or three years, make sure to offer employees more equity in the form of performance or retention grants to keep them engaged in building value.
Use this calculator to determine how much equity to offer startup employees. Download our equity formula calculator here.
Compensating employees with equity keeps them invested, in all senses of the word.
An equity formula needs to account for an employee’s:
- Role. what amount of stock fits their level of seniority?
- Choice. do they want to reduce their salary to increase equity?
- Risk. what’s the value of the company when they join?
Setting role-based equity compensation
To determine a dollar amount of equity, set an equity-to-salary ratio for each job level, and plug in the salary. For example, a $200,000-salary job with a 75% equity-to-salary ratio receives $150,000 in equity.
Example of calculating equity value from salary and equity-to-salary ratio:
The exact equity-to-salary ratio will vary based on role and location. For example, ratios tend to be higher in tech hubs and for technical roles.
Adjusting for employee preference
After determining role-based compensation, you may want to let employees sacrifice some of their salary in exchange for more equity. For example, an employee may choose to decrease their $200,000 salary by 10% in order to receive $20,000 more in shares.
Adjusting for risk
The simplest way to adjust for risk is to divide the dollar value of the equity you want to provide by your best estimate of what the company is worth today. For example, if you want to award $180,000 in equity and an investor just valued the company at $20 million, the employee would earn 0.9% of the company.
Make sure not to play games with the valuation to underpay people: if you overvalue the company, employees will resent being underpaid, and you’ll either lose them or have to issue more equity over time. The valuation should reflect what you could sell the company for today.
Consider the equity calculation for an engineering VP joining a $20 million Series A company.
Fred Wilson suggests the following ranges:
Accel Ventures recommends the following ratios:
You can further research these ratios using AngelList, compensation databases, and advice from VCs and recruiters.
Here’s how Almanac’s equity compensation tool works.
- First, input your target salary for each job level, as well as equity-to-salary ratio.
- This grid will auto-populate Step 2 in the process with salary and equity numbers for different roles.
If you have more job levels or different titles, you can insert them manually here:
Next, choose the valuation for each group of employees.
For example: if you have 15 employees and just raised a Series A at a $20 million pre-money valuation, you can create a pool for employees #16 to 30 with a $20 million valuation. Or you can create several pools to adjust for the company’s progress and the timing of your hiring: $20 million for employees $16 to 20, $22 million for employees #21 to 25, etc.
Finally, add new hires (role, employee number, and percentage of salary to sacrifice for equity), and see the equity value and approximate ownership stake populate in the table.
The equity-to-salary ratio stays the same as the company grows. Just adjust for increasing valuation and salaries.
Example of how salary, equity, valuation and ownership for a role change with scale:
1. It’s expensive to hoard equity.
A startup’s employees make the difference between success and failure. Make sure to build a culture where all key employees win alongside founders when the company succeeds.
Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number five gets.
2. Don’t let the golden handcuffs tarnish — avoid “equity cliffs” by offering retention, performance, and promotion grants.
Tech employees have a two- to three-year tenure on average. Keep your key people longer by giving them additional unvested equity. After two or three years, employees should get annual retention grants, plus additional grants for promotion and extraordinary performance. All of this equity should vest over four-plus years, to ensure equity is always growing and employees never have an incentive to leave.
3. Let employees trade between salary and equity.
Especially early on, when cash is at a premium, let employees choose between cash and equity.
An employee can trade off $20K in salary for $20K more equity:
One way to think about the tradeoff [between dilution and employee ownership] is to ask yourself, if you’re a stockholder, would you rather be assured of retaining a much higher percentage of your key employees and own 97% of [the company’s equity], or deal with the risk of losing valued team members and not suffer the additional dilution? I would take the extra dilution 11 times out of 10.
According to Fred Wilson, this approach can get expensive: if equity is undervalued, you increase dilution; if it's overvalued, you’ll have to make employees whole or face attrition.
4. Communicate in dollar value, not in percentage of company.
This encourages people to focus on the value of their equity, and how they can increase that value. Ownership percentage is zero-sum, making employees worry about dilution.