“If you get equity wrong for the first 10 hires, you do not have a startup. You have a future cap table problem waiting to show up in a Series A diligence room.”
The market rewards teams that treat equity like a product decision, not a last‑minute HR form. Early hires who understand what they own, how it vests, and what the upside might be tend to ship faster, stay longer, and negotiate smarter. The numbers show a simple pattern: clear, fair option grants increase retention and reduce salary pressure, which improves runway and raises the chance you survive to the next funding round.
For most seed and Series A founders, employee stock options sit in a strange middle ground. They are expensive in negotiation terms, cheap in cash terms, and vague in actual perceived value. The trend is clear on one point: investors look for coherent equity stories. They ask: How large is the option pool? How concentrated is ownership among founders? How much equity goes to the first 10 or 20 employees? And can this structure support two or three more funding rounds without breaking morale?
The tension sits between three groups. Founders want to keep control and upside. Investors want enough pool to hire a strong team without blowing out future rounds. Early hires want a bet that actually matters, not lottery-ticket crumbs. The tradeoff is not just about percentages. It is about timelines, strike prices, tax treatment, and how believable the exit story feels to a smart engineer reading an offer.
The business value is direct: well-structured equity lets you recruit senior talent at a 10 to 30 percent salary discount, without lowering performance expectations. That discount extends your runway. A longer runway raises the odds you hit growth targets before the next raise. The equity story is not a “nice to have HR thing”; it is a financing instrument that converts credibility into cost savings.
The trend is not fully clear on what “fair” means across markets and roles. Remote hiring and global teams are bending the old Silicon Valley playbook. Early European and Asian startups often use smaller option pools and more salary. US SaaS companies still lean heavier on options. But the underlying math has not changed: someone will own 100 percent at exit. The question is how you divide that pie today so people still want to stick around and bake it.
Why early equity structure matters for growth and fundraising
Investors look at your cap table like growth analysts read a cohort report. They are not only asking “who owns what.” They are asking “can this team keep attracting talent without blowing up ownership math.”
Several patterns repeat across funded startups:
1. Teams that reserve a 10 to 20 percent employee option pool early raise smoother priced rounds.
2. Early employees that hold 0.5 to 2.0 percent fully diluted tend to behave like owners, not renters.
3. Messy promises (“we will fix your equity later”) often turn into down-round level drama at Series B.
The business value shows up in three places.
First, hiring. A clear equity policy lets you close candidates faster. When you can say “Senior engineer: X to Y options, target Z percent at current valuation, here is the spreadsheet,” you shorten negotiation cycles. Less time hiring means more time shipping.
Second, retention. People stay when they can see a real number in a realistic exit scenario. They do not need guarantee. They need a believable range. “At a $300 million exit, your equity could be worth between $A and $B before tax if you stay through vesting.” That story keeps people during the grind years.
Third, fundraising. VCs often ask two questions in partner meetings: “Is this a founder-friendly cap table?” and “Will key employees feel fairly treated at exit?” If the answer to either feels weak, they price risk into terms.
Basic vocabulary: what early hires actually receive
Most early employees do not receive stock. They receive stock options. The mechanics shape how valuable the grant feels.
Stock options vs restricted stock
Stock options give the right to buy shares later at a fixed price (the strike price). If your common stock value rises beyond the strike price, the difference is your gain on paper.
Restricted stock gives actual shares, often subject to vesting and repurchase rules. Founders often receive restricted stock early when the price per share is very low. Early employees sometimes get restricted stock in very early stages or in lower-tax jurisdictions, but options remain common.
In many US startups:
– Founders: restricted stock, maybe with vesting and a one-year cliff.
– Employees: incentive stock options (ISOs) if they qualify, otherwise non-qualified options (NSOs).
Each type has tax effects. That part affects whether a grant feels valuable or scary when someone thinks about exercising.
Four key variables in an employee option grant
Every employee option package rests on four levers:
1. Number of options
2. Strike price
3. Vesting schedule
4. Post-termination exercise window
Investors look at the aggregate of these grants. Employees feel them at an individual level.
The number of options is what people talk about first. This is usually a function of:
– Your company’s fully diluted share count.
– The “equity bands” you set per role and level.
– Market benchmarks you pull from Radford data, Option Impact, or your own recruiter feedback.
The strike price is usually set at or above the fair market value (409A valuation in the US). Lower strike prices make grants more attractive because less cash is required to exercise.
The vesting schedule gates how quickly people earn the right to exercise. A standard pattern is 4-year vesting with a 1-year cliff:
– First 25 percent after 12 months.
– Remaining 75 percent monthly or quarterly over the next 36 months.
The post-termination exercise window dictates how long someone has to exercise after leaving. Legacy practice has been 90 days. Many newer startups extend to 1 to 10 years for key hires because they recognize the tax burden and cash risk.
The option pool: how big and when to create it
Investors look at the option pool as a shared hiring budget paid in equity. Create it too small and you will renegotiate at every round. Create it too large and you dilute founders early for hires you might never make.
The common pattern across seed and Series A:
– Pre-seed / seed: 10 to 15 percent reserved for employees.
– Series A: 15 to 20 percent fully diluted, often increased as a pre-money condition.
– Series B and later: top-ups of 3 to 5 percent per round, depending on hiring plans.
The key is when the pool gets created relative to new investor money. An investor will often ask for a “pre-money pool.” That means founders and current holders take more dilution, not the new investor.
How option pool math affects founder and early hire ownership
Consider a simple case:
– Founders: 80 percent
– Seed investor: 20 percent
– No option pool
Now you go to Series A. Investor asks for:
– 20 percent new equity
– 15 percent option pool created pre-money
You might end up with:
– Founders: around 51 to 55 percent
– Seed: around 13 to 15 percent
– New investor: 20 percent
– Option pool: 15 percent
Employees will swim in that 15 percent for the next few years. If you already granted 5 percent to the first 10 hires, you actually have 10 percent left unallocated.
How much equity to give early hires: realistic ranges
The ranges vary by stage, sector, and geography. But there is a rough market pattern that still shows up in term sheets and offer letters.
For the first 10 to 15 hires at a seed or early Series A startup, you often see something like:
– VP or very senior exec (core function): 1.0 to 3.0 percent
– Senior IC engineer or product leader: 0.5 to 1.0 percent
– Mid-level engineer or designer: 0.25 to 0.5 percent
– Early generalist or ops lead: 0.1 to 0.4 percent
This is fully diluted ownership, not out of the option pool only.
Investors do not fix these numbers, but they pay attention. If an early VP of Engineering holds 0.1 percent after seed, they might question whether that leader feels bought in. If your first engineer holds 5 percent fully diluted and you raised only a small pre-seed, they wonder if you can keep granting meaningful equity at later stages.
“At Series A, I want to see that the first 10 employees collectively hold somewhere between 10 and 20 percent. Less, and I worry the upside is too concentrated. More, and I worry the founders gave away leverage too early.”
This kind of investor comment guides how you design ranges. You want a structure where:
– Founders retain enough ownership to stay motivated through dilution.
– Early employees hold enough that a good exit can change their financial life in real numbers, not just in theory.
– Later hires still have room to receive non-trivial grants.
Comparing early-stage equity structures: then vs now
To understand where equity for early hires is heading, it helps to compare earlier Silicon Valley patterns with current norms.
| Equity Practice | Early 2000s Startup | Mid-2020s Startup |
|---|---|---|
| Standard option pool size at seed | 5% to 10% | 10% to 15% |
| Post-termination exercise window | 90 days common | 1 to 10 years for key hires more frequent |
| Vesting schedule for employees | 4 years, annual vesting in some cases | 4 years, monthly vesting after 1-year cliff |
| Equity for first engineer | 0.5% to 2.0% | 0.25% to 1.0% |
| Remote employee equity discounts | Rare; mostly co-located teams | Geo-based adjustments common |
| Transparency on cap table | Low; few employees saw full cap table | Higher; more teams share ranges and scenarios |
“Back in 2005, we rarely saw 10-year exercise windows. Now, especially post-2020, top candidates ask about it before they ask about salary. They have been burned before.”
The shift toward longer exercise windows has clear business reasons:
– It reduces the “golden handcuff” effect where people stay only because they cannot afford to exercise.
– It makes your equity grants more competitive without increasing percentage ownership.
– It signals confidence in the long game, which senior candidates read as a positive signal.
Case study framing: how three hypothetical startups structure equity
To make this concrete, consider three simplified examples. The numbers are not universal rules. They illustrate tradeoffs.
Case A: The tight founder-heavy model
– Seed round at $8 million post-money
– Founders: 80 percent
– Seed investor: 20 percent
– Option pool: 10 percent carved out inside the founder portion
First 10 hires get:
– VP Engineering: 1.0 percent
– VP Sales: 0.75 percent
– First engineer: 0.75 percent
– Next 3 engineers: 0.4 percent each
– Product lead: 0.4 percent
– Ops lead: 0.25 percent
– CS and marketing: 0.15 percent each
Total granted to first 10: roughly 4.65 percent. Remaining unallocated pool: 5.35 percent.
Business strengths:
– Founders keep strong ownership.
– Plenty of pool left for Series A hires.
Risks:
– Some senior hires might see the grants as light compared to peers.
– At a modest exit (for example $80 million), the VP grants might feel underwhelming after tax.
Case B: The generous early-talent model
– Pre-seed at $5 million post
– Founders: 70 percent
– Pre-seed investor: 15 percent
– Option pool: 15 percent
First 10 hires:
– CTO-level engineer (non-founder): 3.0 percent
– Head of product: 1.5 percent
– First engineer: 1.0 percent
– 4 engineers: 0.5 percent each
– Designer: 0.4 percent
– Ops lead: 0.3 percent
– Customer lead: 0.3 percent
Total: 8.0 percent of company.
Business strengths:
– Very strong early team buy-in.
– Easier to recruit senior technical talent with modest salaries.
Risks:
– Later investors might push back if founders are already below 50 percent at Series A.
– Option pool may need a top-up sooner, adding more dilution.
Case C: The balanced growth-ready model
– Seed at $10 million post
– Founders: 65 percent
– Seed: 20 percent
– Option pool: 15 percent
First 10 hires:
– VP Engineering: 1.5 percent
– VP Product: 1.0 percent
– First engineer: 0.75 percent
– 4 engineers: 0.4 percent each
– Marketing lead: 0.3 percent
– Ops lead: 0.3 percent
– Design lead: 0.3 percent
Total: 5.0 percent. Remaining pool: 10 percent.
This pattern leaves room for:
– Future VP Sales: 1.0 percent at Series A
– Additional senior roles: 0.5 to 0.75 percent each
– Individual contributors: 0.1 to 0.3 percent
Investors often favor something close to this structure because it balances long-term hiring needs with present-day fairness.
How equity for early hires compares to later hires: then vs now
To explain expectations, some founders like to compare early-hire equity with what a similar role might get if joining at a later stage. This shows the “time-risk trade.”
| Role | Seed-stage equity range (Then) | Seed-stage equity range (Now) | Series C equity range (Now) |
|---|---|---|---|
| VP Engineering | 2.0% to 4.0% | 1.0% to 2.5% | 0.2% to 0.6% |
| Senior Engineer | 0.5% to 1.5% | 0.25% to 1.0% | 0.05% to 0.2% |
| Head of Product | 1.0% to 2.0% | 0.5% to 1.5% | 0.1% to 0.4% |
| Ops Lead | 0.2% to 0.6% | 0.1% to 0.4% | 0.01% to 0.08% |
“In 2005, 1 percent for a senior engineer at seed was almost a default in the Valley. Now, with higher valuations and bigger rounds, 0.25 to 0.75 percent is more common. The upside per point is higher, but points are more scarce.”
This historical shift connects to higher initial valuations. If your seed round values the company at $20 million, 1 percent on paper is $200,000 of theoretical present value. That shapes negotiations.
Setting equity bands: a practical framework
Founders who treat equity like ad hoc negotiation tend to overpay noisy candidates and underpay quiet ones. That creates internal tension that surfaces during later funding rounds when people compare notes.
A more durable approach:
1. Define levels for each role family (engineering, product, design, go-to-market, operations).
2. Set equity bands per level and per stage.
3. Adjust for geography, but keep ranges narrow to avoid resentment.
4. Use a “refresh grant” policy for promotions or retention.
For example, you could say:
– Engineer L1 (junior): 0.05 to 0.15 percent
– Engineer L2 (mid): 0.1 to 0.25 percent
– Engineer L3 (senior): 0.25 to 0.6 percent
– Engineer L4 (staff / principal): 0.6 to 1.2 percent
You anchor offers inside these ranges based on:
– Criticality of the role to near-term roadmap.
– Scarcity of talent for that role in your market.
– Candidate seniority within the level.
This level-based approach gives you room to explain offers without emotional arguments. It also helps investors understand hiring budgets in board meetings.
Vesting terms that support real retention
The standard 4-year vesting with 1-year cliff still dominates. But small tweaks in vesting terms can align incentives better, especially for founders and the earliest hires.
Common structures:
– 4-year vesting, 1-year cliff, monthly vesting afterward.
– 4-year vesting, 1-year cliff, quarterly vesting afterward.
– For founders: 4-year vesting with partial backdating to company formation date.
A few teams add performance-based vesting for specific grants, but equity linked to revenue or product goals can create confusion if not defined very cleanly.
For early hires, the most significant vesting-related signal is how you treat:
– Acceleration on change of control (single-trigger or double-trigger).
– Unvested options if the role is eliminated.
– Departures that are “good leaver” vs “bad leaver.”
Single-trigger means options vest automatically upon acquisition. Double-trigger means they accelerate only if the acquisition happens and the person is terminated or their role changes materially.
Investors usually prefer limited or no single-trigger acceleration for large grants because it can scare acquirers. Early employees often ask for double-trigger on at least part of their unvested equity. A common compromise: partial double-trigger acceleration for executive roles, standard vesting for most others.
Post-termination exercise: a silent deal-breaker
Many otherwise strong offers fall apart around a single line in the option agreement: “You must exercise your options within 90 days of termination.”
For someone with a large grant at a company that has grown in value, that line can translate to:
– Large cash outlay to buy the shares.
– Alternative minimum tax (AMT) concerns.
– Pressure to stay employed for financial reasons rather than job fit.
Founders that extend this window to 1 year or more reduce this pressure. They also reduce the chance that former employees hold “zombie options” that are never exercised.
Investors used to push back on long windows because they complicate 409A valuations and can increase option expense accounting. The market has softened. Many top-tier backed startups now offer:
– 1-year window for most employees.
– Up to 5 or 10 years for early-tenure or high-impact roles, sometimes with a tradeoff such as:
– Longer window in exchange for converting ISOs to NSOs.
– Smaller refresh grants later.
The tradeoff for the company is clear: longer windows keep more options “alive” on the cap table, which can slightly increase option expense. But they also solidify employer brand in a talent pool that remembers previous crunches.
Clarity for candidates: how to communicate equity value
Most candidates do not live in spreadsheets. They want a simple, honest explanation that respects their intelligence without drowning them in jargon.
Three elements help:
1. Share what percentage their grant represents on a fully diluted basis.
2. Provide 3 scenario values: conservative, middle, and aggressive exit cases.
3. Explain vesting and exercise in plain language.
For example:
– “You are receiving 80,000 options. That equals 0.4 percent of the company on a fully diluted basis right now.”
– “If we sell for $100 million and you are fully vested, this could be worth roughly $X before tax. At $300 million, it could be $Y. At $1 billion, it could be $Z.”
– “You earn 25 percent after one year here, then the rest monthly over the next 36 months. If you leave, you will have 1 year to decide whether to buy the shares.”
You are not promising outcomes. You are giving enough structure for them to judge risk and upside.
“We started attaching a one-page ‘Equity 101’ to every offer. Close rates improved, and we spent less time in repeated explanations. People want to feel the company knows what it is doing with equity.”
From a business standpoint, this clarity:
– Raises close rates without raising comp.
– Reduces future frustration when valuations go up or down.
– Lowers legal risk because expectations were more grounded.
Global teams: equity vs cash across markets
Remote hiring created a second layer of complexity. The same role might exist in San Francisco, Berlin, and Bangalore. Salary bands differ. Equity expectations differ too.
A common approach:
– Anchor salary to local market.
– Tie equity more tightly to role level than to geography, with limited downward adjustment.
For example, you might say:
– US Senior Engineer: 100 percent salary baseline, 100 percent equity baseline.
– Europe Senior Engineer: 80 percent US salary, 80 to 100 percent equity.
– India Senior Engineer: 60 to 70 percent US salary, 60 to 90 percent equity.
The “then vs now” comparison on this topic looks like:
| Global Equity Practice | 2005 Era | 2025 Era |
|---|---|---|
| Remote senior engineer equity | Rare; most companies did not grant | Common; often slightly reduced from HQ level |
| Employee stock option plans outside US | Limited, often ad hoc | Structured with local counsel in key countries |
| Equity education for non-US hires | Minimal | More normal to share FAQ docs and tax pointers |
The tradeoff for founders is between administrative cost and talent reach. Setting up proper plans across borders costs legal fees and time. But for high-skill roles, the ability to offer real equity can be the difference between hiring and losing someone to a US competitor.
ESPPs, RSUs, and how they compare for early hires
For very early-stage startups, simple options are usually enough. But as you cross into late Series B or beyond, other instruments appear:
– Employee Stock Purchase Plans (ESPPs): allow employees to buy stock at a discount via payroll deductions.
– Restricted Stock Units (RSUs): promises of shares delivered at vesting, common among larger tech firms.
For early hires, the shift from options to RSUs signals a move from high-risk growth to more mature operations. The value per unit becomes easier to estimate. The upside per unit might flatten.
From a founder’s perspective, this matters because early hires compare offers from both early and late-stage companies.
A rough then vs now picture:
| Equity Instrument | Typical for Startups (Then) | Typical for Startups (Now) |
|---|---|---|
| Stock options | Primary tool from seed to pre-IPO | Primary tool seed to Series C |
| RSUs | Mostly public companies | Common from late-stage private onward |
| ESPP | Rare in startups | More common from late-stage upward |
When you hire someone at seed who might have had RSUs at a big tech company, you need to explain the difference clearly. The cash predictability drops. The upside range expands. That is the trade they are making.
Avoiding common equity mistakes with early hires
A few patterns create outsized problems later:
1. Vague verbal promises
Telling a candidate “we will take care of you later” without written ranges is almost guaranteed to surface in a board discussion in two years. Investors will ask why one early engineer suddenly demands an extra 0.5 percent during a round.
2. Constant one-off exceptions
Paying above-band equity for every tough hire adds up. When you later publish leveling and equity bands internally, people will notice the gaps. That has real retention cost.
3. No refresh grants
If early hires do not receive additional equity with promotions or strong performance, their ownership as a percentage of the company shrinks fast with each funding round. They feel it when new, more recent hires receive packages that look similar on paper. Regular refresh grants aligned with performance reviews help.
4. Ignoring tax in explanations
Offering a giant option grant that is almost impossible to exercise without heavy tax burden can backfire. At least outline the basics:
– ISOs vs NSOs.
– AMT considerations.
– That you cannot give tax advice but you encourage them to speak to a professional.
5. No exit scenario modeling
People often anchor on unicorn narratives. If the only number ever discussed internally is “$1 billion exit,” then a $150 million sale can feel like failure, even when it creates real money for employees. Sharing a range of believable outcomes early keeps expectations grounded.
What early hires should ask, and how founders can prepare
Smart early hires ask questions that investors ask. Founders can either treat that as a threat or as proof they are hiring people who think like owners.
Common early-hire questions:
– “What percentage of the company does my grant represent right now?”
– “What is the current 409A valuation and strike price?”
– “What is the vesting schedule and exercise window?”
– “How big is the option pool now, and how much is already allocated?”
– “What happens to my options if we get acquired or if I am laid off?”
Founders who can answer this calmly and consistently send a clear market signal. They treat equity as part of the business model, not as a side perk.
From a growth perspective, that matters. When those early hires later recruit their own teams, they will reuse your explanations. They will either propagate confusion or clarity.
How equity structures changed since the mid-2000s
To close the loop on “then vs now,” think about an imaginary early employee reading an offer in 2005 versus the same role in 2025.
– In 2005, the doc might mention a 90-day exercise window in small print. In 2025, a candidate might bring a spreadsheet and ask about 10-year windows.
– In 2005, global equity plans were rare. In 2025, founders often design for distributed teams from day one.
– In 2005, transparency on cap tables inside the company was low. In 2025, more founder decks include cap table overviews at all-hands meetings.
“In 2005, early hires took equity almost on faith. Now, they read term sheets like junior investors. The story has to hold up mathematically, not just emotionally.”
That shift pushes founders toward more structured, data-focused equity programs. The companies that adapt raise and hire more smoothly. The ones that keep equity fuzzy tend to pay the price in longer hiring cycles, heavier salary pressure, and tougher board conversations later.