How much Equity should you give Employees / Advisors / Co-Founders in Your Startup?

Determining the appropriate equity distribution among various stakeholders in a startup is a crucial decision that can impact the company’s success. While there is no one-size-fits-all approach, the following guidelines provide a broad framework for equity allocation. It is important to note that these suggestions may vary depending on individual circumstances.

Co-Founders:

1. Equal Split: Ideally, co-founders should consider an equal equity split, even if one joins later and no funding has been raised.
2. Special Considerations: If one co-founder brings a patent or valuable intellectual property to the startup, an additional 10-15% equity may be justified. However, if it is based solely on time invested, maintaining a 50:50 split is recommended.
3. Reverse Vesting: It is essential to include a “Reverse Vesting” clause in the co-founders’ agreement, ensuring that if a co-founder leaves, their equity is not retained.

Employees:

1. First Employee: The first employee typically receives no more than 0.75% of the company’s equity. Subsequent hires should receive decreasing percentages, such that the first ten key hires collectively hold no more than 2.5% equity.
2. ESOP Pool: Establish an Employee Stock Ownership Plan (ESOP) pool, which usually ranges from 8% to 20% of the company’s equity. Start with 8% initially.
3. Vesting: ESOPs typically vest over four years, with a standard 1-year cliff and straight-line vesting.
4. Increment Considerations: During salary increments, key employees may be offered the choice between a cash increase or 2-3 times the proposed increment in equity.

Investors:

1. Funding Rounds: When raising funds, aim to limit equity issuance to 15-22% of the company’s valuation for the next 24 months, typically during the Seed or Series A stages.
2. Founder and Employee Equity: Strive to maintain at least 15% equity for founders and 15% for employees at the time of an initial public offering (IPO). Avoid diluting more than 70% over an 8-10 year period.

Top Management:

1. CXO Positions: CXOs hired after the Series A funding round may expect equity ranging from 2-5%, depending on the specific role.
2. CEO and CFO Equity: CEOs commonly receive around 5% equity, while CFOs may expect 1-2%.