How Much Equity Shall I Give To My First 10 Employees?

The Significance of the First 10 Employees in a Company's Growth Journey

The first 10 employees in a startup are more than just workers; they are pioneers who shape the culture, execute the vision, and carry the weight of early successes and failures. These individuals play a significant role in setting the tone for the company's future, making it essential to offer them attractive compensation packages, including equity.

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Factors to Consider When Determining Equity for Early Employees

When deciding how much equity to offer your first 10 employees, consider three key factors: their contribution, the risk they are taking, and their future potential within the company.

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Contribution

Each employee's contribution should be evaluated based on their role and impact on the company's short-term and long-term goals. Key hires like CTOs or lead developers might warrant more equity due to their critical contributions to product development and technology strategy.  Those key hires are of the utmost importance in the early days of a company, so you're likely to provide more equity early on based on these factors

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Risk

Joining a startup, especially in its early stages, involves considerable risk. Employees often leave stable jobs to join a venture with uncertain prospects. Offering equity is a way to compensate for this risk and acknowledge their belief in the company's vision.

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Future Potential

Consider the future potential of each employee when allocating equity. Those who show promise for leadership roles or have unique skills that will be essential as the company grows should be incentivized accordingly to ensure their long-term commitment.

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Structuring Employee Equity Packages to Maintain Motivation and Retention

Structuring employee equity packages effectively is crucial for maintaining motivation and retention. Here are some tips:

• Vesting Schedule: Implement a standard vesting schedule to ensure employees remain committed over the long term. While traditional vesting includes a four-year schedule with a one-year cliff (the period of time an employee needs to work before their equity begins to accrue), a recent trend is showing those schedules shortening to a 1 year cliff and two year vesting, or removing the cliff entirely. When structuring the cliff, you always want to balance how quickly the employee starts to earn equity with how motivated you want them to be for the project in the long term
• Clear Communication: Make sure employees understand the value of their equity and how it can grow as the company succeeds. This is essential for early startup employees. As we established earlier, employees of early stage startups are taking a risk by choosing your company over a stable job with a big established firm. That means they expect higher potential rewards, and need to have a clear perspective on how their equity will benefit them at each stage of their career at your company
• Adjustments: Be willing to adjust equity packages based on performance and evolving roles within the company. This means refresher and tenure grants to employees that have earned them, and other equity-related benefits.

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Case Study: Kevin Jurovich's Approach to Equity Distribution

Kevin Jurovich, a seasoned startup founder, recently discussed how he manages ESOPs in his companies. He suggests allocating around 10% of the company's equity to the first 10 employees and emphasizes the importance of financial success for early those team members. According to Jurovich, the average equity for early hires should be:

• Hire 1: 1.27%
• Hire 3: 0.52%
• Hire 5: 0.34%
• Hire 7: 0.24%
• Hire 9: 0.20%

Jurovich stresses the need to balance attracting and retaining top talent while ensuring the company retains enough equity to attract investment and grow.

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Conclusion: The Role of Employee Equity in Building a Strong, Motivated Team for Long-Term Success

Determining how much equity to give your first 10 employees is a complex but vital task. By considering factors such as contribution, risk, and future potential, and by following industry benchmarks and best practices, you can create a fair and motivating equity distribution plan. Remember, the goal is to build a strong, motivated team that shares in the company's success and is committed to its long-term growth. With a thoughtful approach to equity distribution, you can lay the foundation for a thriving enterprise.

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