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How much equity should a first employee be offered?

How much equity should a first employee be offered?

More details:

Given these parameters, what would be an appropriate amount of equity to offer to a first engineering hire?

Answer 897

I’m not sure I would feel comfortable giving a solid number in response to this, just because there are a number of factors that I couldn’t possibly know about the circumstances. I’ll try and go over a few of those, but I think it’s ultimately–no surprise–up to you to really establish what you want to give the person.

It’s certainly not the same question, but some similar themes are present here as are in https://startups.stackexchange.com/questions/195/best-way-of-dividing-equity-among-founders.

Individual’s Value

This one is two parts subjective and one part based on market knowledge (which it sounds like you have). Basically, and I’m taking some of this from my answer to https://startups.stackexchange.com/questions/184/is-employee-value-derived-from-their-equity, equity should be used as a tool to gain leverage over competition. To justify use of that tool, you’ll want to make sure that the person you’re seeking is actually worth it. You don’t want to offer someone 20% of your company, when realistically you could get someone of equal value to you for much less. Here’s where you have to review the person’s résumé and, well, je ne sais quoi. Estimate how much the person would be worth to competitors (which also includes a look at how many equally qualified people there are on the market), and estimate how much the person thinks your business is actually worth to the new hire.

Remember that whatever value you place to your business’s likelihood of success, that number might vary from that of your potential hire. Hopefully his or hers won’t be too much lower than yours (and if it is, they probably won’t value your workplace enough to be a great contributor), but you need to take that into account when establishing a good amount of equity. If he or she is crazy-excited about your business, a small amount of equity will go a whole lot longer than if he or she is just looking for something to pay the bills and happened across your ad. Of course, keeping morale up is part of the key here.

Risk

This can help you assess how much the new hire might consider your company worth, as well as giving indication of how much they’re owed. How much risk is the potential employee putting in? If they’ve been job-hunting for two years and you’re the first person willing to give them a serious offer, that’s not much risk. However, if you’re offering them a signing bonus to drop out of university because they’re the only perfect candidate, you’d better be ready to back that with a higher amount of equity.

Irreplaceability

I’m following a bit what I said in my previously-linked-to “best way of dividing equity” answer, and this part is important too. You mention that your founders are all non-technical and this is the first technical person. That probably means their work will wind up very, for lack of a better word, “entangled” with them, personally. If we’re talking SDEs, their work will likely be difficult to understand by even a second developer coming on, without them to help out. It’s not always the case, but it certainly can be. That raises the stakes in a distinct way. You want to keep them around, and should probably then give them more equity to support their interest. In a way, your first technical hire (assuming this is a tech company) will become a founder of sorts for you. He or she will be offering input that you couldn’t have without a similarly seasoned professional. Value that.

Plans for Future Employees

Once you’ve worked that all out, you’ll want to think about what your future plans are. This is a new hire, not a founder, that you’re talking about giving equity to. Will you give it to every new hire from now on (hint-hint)? If someone you pull on right now gets a certain amount, and someone you pull on in six months gets more, that could be an unfortunate situation, even if the later person has more qualifications or risk. Try to have a plan ahead of time, and set precedent now if you can.

Answer 901

There is a great post by Joel Gascoigne: Open Equity Formula

Here's their breakdown of the formula:

Type of role:

Each key role has a base percentage of equity. For example: Product Manager - 0.75%, Engineer - 0.8%, etc.

Salary or Equity Choice

According to Buffer, each employee a choice to make: $10,000 additional salary or ~30% more equity.

Risk Layer:

There is a big risk difference between starting as the 5th person versus starting as the 50th. For example:

For more info about risk layers, read this.

Seniority:

Senior - 0.1, Lead - 0.2

To summarize all those parameters, we get the following formula:

(Role*Experience/Risk)+Seniority

Buffer also have an Open Salary formula as well.

Answer 913

Going by the numbers, the percentage would likely be ".5 to .9":

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Source: AngelList's Explore Salary & Equity Data

(As such, I'd offer half that amount, and be willing to double it if needed.)

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