Employee Equity: How Much?
I wrote a blog post about this topic in November 2010 that has become one of the most searched on and referenced AVC posts of all time. The numbers in that blog post are long out of date and so I now have a popup on it warning people not to use those numbers. However, the methodology in that blog post remains sound and is used by many startup companies.
Yesterday, Matt Cooper, the CEO of our portfolio company Skillshare, published a very detailed blog post on how Skillshare uses that methodology in their employee equity program.
He includes updated multipliers for the NYC startup market in that post, which is something many readers have been asking me for over the last few years.
The reality is that these multipliers differ from market to market. They are highest in the Bay Area, high in NYC/LA/Boston, and lower in other parts of the US and in Europe, and even lower in other parts of the world. And, like all markets, they change over time. So it is hard to maintain a valid set of multipliers and I have given up on doing that. A startup could be created to maintain those numbers, or an established company like Carta, which has access to the raw data, could do it.
But even with the vagaries of what multipliers to use, the methodology that I laid out in my initial blog post on the topic is best practice in my view and anyone who is struggling to figure out how much equity to be offering employees would be well served by reading Matt’s post.
Comments (Archived):
Useful thanks.Questions on this will never stop being asked.
Much appreciated. Thanks
To your knowledge, do incoming execs ever use this formula to negotiate for more options? Seems like it could work both ways!
I’ve referred so many entrepreneurs to that original post over the years, with the caveat to take the ratios w a grain of salt and to create more granularity, which was Matt’s approach more or less. I’m glad he took it even further, so now, his is the reference point 😉
I like the concept of determining an end goal of $ “reward” value everyone is happy with, assuming they work well and remain with the company, with an exponential release of the agreed upon value by the end of the agreed upon term. So if a person negotiates a term of 3 or 5 years of x% until $y value is reached then say halfway through their term the value would only be 30% realized (or whatever it would be) until end of term reaches 100%. If they leave the company after their term and the following 5+ years the company becomes worth 1000x – then they’re not unreasonably rewarded. That lessened dilution/saved reward they’d otherwise get can be redistributed to maintain a stronger organization. I don’t want to lay out an example clearly now, hopefully concept isn’t too vague. I certainly haven’t stated all of the positives with it including possibilities of renegotiating your value or term if role becomes more important/different, or at renewal time creating a new term with end $ reward, likewise the counterbalance and negotiation and possible flexibility with salary, etc. You also have to trust you’ll be treated fairly and not be let go early simply so your equity doesn’t reach its full release point. I think it’ll make a much healthier organizational structure – it also doesn’t exclude having the standard equity structure for core founders, it really all depends on how tightly you want to run your ship, how efficient you want it, how few leaks you want in your boat.
Such a timely share.I’m talking w/ the CEO of a Children Coding School startup. They are bootstrapped and have a TON more demand from schools than he can currently fill.He wants to growth to the next level but the idea of giving employees equity seems foreign to him.Eagerly looking for any advice or links on how to help him become comfortable with this idea.
Sounds like the perfect thing to franchise.
Here are some approaches you may try. (1) he’s greedy. Frame it as a way to hire people for less cash so that the cash can be used for growth (or to pay himself). Employees, are often willing to accept less cash if there is stock-based comp.(2) he wants control. He can maintain control by issuing profit-share based comp (e.g. Stock Appreciation Rights or Phantom Stock). This allows key employees to participate in the value they create but not in the board-room(3) FOMO. Most high-value potential employees will understand their own value and expect to be compensated for their future value. He will miss out on this talent pool by not offering stock-based comp.(4) best practices: companies that are at the stage he wants to get to already do this. The founders still make boatloads of money, and everyone is happy (will need to provide examples)
Thank you. Matt’s templates are helpful for future reference. Really illustrates the value creation opportunity for early stage companies that can lock in on a growth business model. > 5x revenue multiple (as a conservative estimate) is pretty impressive.