Dear SaaStr: How Much Equity Do You Give to Employees at Different Stages of Growth?
Equity allocation changes dramatically depending on the stage of your company and the role of the employee. Here’s a breakdown of how to think about it at different stages of growth:
1. Pre-Seed / Seed Stage (Pre-Revenue or <$1M ARR)
At this stage, you’re compensating for high risk with high equity. Employees are taking a leap of faith, so you need to reward them accordingly.
- Co-Founders: Typically split 20%-50% of the company, depending on the number of co-founders and their contributions.
- First 10 Employees: Allocate 10%-15% of the company for this group.
- Key hires like a VP of Engineering or VP of Product might get 1%-2% each.
- Senior engineers or designers might get 0.5%-1%.
- Junior employees might get 0.1%-0.25%.
- Another way to think of this stage; the first 10 or so should probably get at least twice the equity of others for joining early, if they are mission-critical hires.
The goal here is to give early employees enough equity to feel like true owners. A good rule of thumb is to offer 2x-3x the equity you’d give at later stages to account for the risk.
Equity Pool: Set aside 15%-20% of the company for employees at this stage. This ensures you have enough to reward early hires without running out too quickly.
2. Early Growth Stage ($1M-$10M ARR)
At this stage, you’re starting to scale, and the risk is lower. Equity grants become more standardized, and you focus on attracting experienced hires who can build the machine.
- VPs / Executives: Typically 0.5%-1.5% depending on the role and impact.
- Senior Engineers / Managers: 0.2%-0.5%.
- Mid-Level Employees: 0.1%-0.2%.
- Junior Employees: 0.05%-0.1%.
The equity pool for employees might shrink to 10%-15% as you grow, but you can always expand it later if needed.
3. Scaling Stage ($10M-$50M ARR)
By now, you’re hiring people who want the machine running already. Equity becomes less of a motivator, and cash compensation takes precedence.
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Executives: 0.3%-1%, depending on the role Executives: 0.3%-1%, depending on the role and impact. For example, a VP of Sales driving ARR growth might get closer to 1%, while a VP of HR might be closer to 0.3%.
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Senior Managers / Directors: 0.1%-0.3%.
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Mid-Level Employees: 0.05%-0.1%.
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Junior Employees: 0.01%-0.05%.
At this stage, equity grants are more about retention than recruitment. You’re competing with larger companies, so equity needs to be paired with strong cash compensation.
4. Late Stage ($50M+ ARR)
Equity becomes a smaller part of the package, and cash dominates. Grants are typically reserved for executives and key hires.
- Executives: 0.1%-0.5%, depending on the role.
- Senior Managers / Directors: 0.05%-0.1%.
- Mid-Level Employees: 0.01%-0.05%.
- Junior Employees: 0.005%-0.01%.
At this point, you’re likely refreshing equity pools for retention rather than issuing large initial grants.
**Key Considerations: Ensure equity vests over 4-5 years with a 1-year cliff to align incentives and protect both sides. Refresh grants for high performers every 2-3 years to keep them motivated.
General Guidelines
- Transparency: Use a clear, logical equity model that employees can understand and feel is fair. CEO of Cockroach DB Spencer Kimball’s approach of allocating equity in tiers—10% for the first 20 employees, 5% for the next 20, and so on—can be a good starting point.
- Adjust for Risk: Early employees take on more risk, so they deserve more equity. As the company grows, equity grants should decrease proportionally.
- Flexibility: You can always expand the equity pool later if needed. Don’t let fear of dilution stop you from rewarding key hires.
