Allocating Equity to New Team Members

For a startup, equity is the most important asset it has. Equity is distributed by the founders to raise investment and even to hire great talent.

Giving equity to new team members has some benefits

- The startup may not be able to afford a talented person it wants to recruit. Giving equity helps in attracting that person to join in despite offering a comparatively lower salary.

- Giving equity to new team members is a great way to align their interests with the interests of the startup as a whole.

On the flip side, giving equity means that you are giving a piece of the company and are assuming that the new hire and the startup will find each other to be a good fit for each other. To reduce the uncertainty in this assumption, a lot of startups offer equity options, which get converted into common equity after a particular period of time, during which the fit and understanding of the new hire and existing team can be studied and assessed.

So having decided that equity can prove to be a great tool to get new talent to join, how do we decide what percentage is fair. This is an analysis which the entrepreneur must do.

Value the amount of money, time and effort which has already gone into the business. Now add to it the value of time, money and effort which will be put into the startup going forward. Let’s call this sum A. Now value the money, time and effort which the new team member will put in going forward. Let’s call this B. Dividing B/A will be a good proportion of equity to offer to the new team member. You can probably add to it a little growth premium to account for any additional growth the startup may see because of the hiring.