How Should You Divide Equity As Your Company Grows?

Next up was Jeroen, our VP Engineering. I went through almost the exact same conversation with him when he joined the company.

“Here’s what a VP Engineering gets for equity,” I said to Jeroen. Jeroen looked at me and said, “That seems fair.”

We shook hands, and that was that. My conversations with Adolfo and “Randy,” my other two co-founders, went similarly.

 

And that’s how it should be for you and your co-founders. You should be in synch with regarding the equity split.

 

So, off we went to close our initial funding. At the same time, we were in heavy recruiting mode for engineers.

We had a plan to hire to around twenty employees, including the founders, by the end of year one. Then we would get to 35 employees by the end of year two.

We knew what the equity ranges for each of the roles we were hiring was, and we stuck to that. Our philosophy was really simple; we wanted to be a little higher than center cut for the equity.

In other words we wanted to be in the top 50% for each role, but not at the top. If you pay too much, then you’ll run out of equity, so that didn’t make sense.

If you pay too little, then you're not going to be able to hire the best talent.  And, It's tough to build a great company without great people.

I assumed that we would have to carve out an option pool of 20% to cover the first two years post funding. And that turned out to be correct. That means that the founders and the investors own the remaining 20%.

 

You should keep being generous with your equity as your company continues growing.

 

You’re likely going to have to round out your executive team (we did), and that means you’re going to giving 1% or higher grants to people. Plus you’ll want to refresh your employees.

Refreshing employees where you grant an existing employee more stock is a smart way to reduce your turnover. Here’s how refreshing should work.

Let’s say you hired a senior engineer and granted to engineer 0.8% that vested over four years. Two years later, you want to refresh the employee. What do you do?

The simple way to look at this is think of what equity would you grant the employee if you had to rehire the person. In this case, the engineer would get 0.5% because that is what a senior engineer gets at this stage of the company.

So you would grant the employee another 0.25% vesting over two years that would be tacked onto the end of the existing grant. Now the employee’s future stock grants look like this:

YR1  YR2   YR3      YR4

0.2% 0.2% 0.125% 0.125%

So, there's always a financial upside incentive to sticking around.  It's good for the employees and it's good for the company.

You may have to fight with your investors to allocate the stock you need.

 

As our company kept growing, we kept dividing the equity with this simple philosophy. We would look at the hiring plan and allocate equity based on the roles we were hiring. Then we would look at the employees we needed to refresh and allocate stock to them.

Fortunately, our investors were supportive of what we wanted to do. However, it wasn’t like I didn’t need to justify what we were going to do.

I had to provide them with a spreadsheet of each and every role we were hiring for, and I had to provide them with a justification for each employee we wanted to refresh.

Every year, our investors and board of directors approved the equity pool we wanted for our employees.  Their foresight helped us have a very low employee turnover where virtually no employees quit.  That's the gold standard you want when you're designing your employee retention plan.

For more, read: When Should You Stop Giving Equity To Your Team?

 

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