What percentage of shares should be set aside for employee equity?
Nuanced answer: A lot. But, the precise number today doesn’t matter.
VC answer: 10–15–20%, depending on situation (more detail below).
What do I mean? I just want to tease this out because Internet Advice is so confusing here.
You need equity for your employees. At least in my limited experience, the amounts are often the most “generous” in U.S. based companies. Most Silicon Valley-based, traditionally structured start-ups set aside 20% of their cap table in the beginning for employees, and then “refresh” that after each venture round for future hires, so that there is always at least 10% or more ungranted in the pool.
That typically will also last you at least until the next venture round, if there is one.
However, the reality is you can always add more shares. All that matters is the board and shareholders (in most cases) agree. Your lawyers can do it in just a few hours.
Only have 1m shares for employees, but need another 500k? It’s fine as long as everyone says it is. It’s just those 500k will dilute everyone.
So start off with 20% blocked off for employees in the early days. That’s a good place to start.
But understand when VCs come up with metrics here, they are (x) really just trying to agree on an amount of dilution here up-front, so they know what they are buying, and (y) in some cases, playing a bit of a game to lower a valuation by including more options in the “pre-money” valuation.
Put differently, if I am investing at say a $20m valuation, I’d much rather know that it includes all the options we need to issue for the next 18 months at least. That way, at least I know for sure how much I am buying. Percentage ownership is very important to many investors. If there is nothing left in the pool, not only will my effective price go up, but even more importantly, I may not reach my ownership target due to this dilution. I’d rather settle on that target up front with more certainty.
Anyhow, net net you can always add more shares later. It’s not hard at all. Internet Memes will suggest it is hard. It isn’t.
The question is just who takes the dilution.