A startup founder’s guide to allocating equity grants

The date is January 11, 2022.

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Equity compensation is important in the war for talent, but it is not easy to explain.

Equity is not a new concept. Public and private companies have been using stock options for decades to recruit and retain talent. When it comes to hiring, retaining and aligning incentives across all employees, equity compensation has grown in importance.

There are a few reasons why this is happening.

Candidates with in-demand skills are getting multiple offers and can name their price. More and more these days, that price includes an equity component.
The labor shortage and market dynamics are causing wage inflation. Companies are looking for ways to increase their compensation. One way to do this is through equity.
The number of companies that are reaching unicorn status is increasing. According to CB Insights, more than 450 companies have achieved unicorn status in the year 2021, up from the previous high of 112 in 2019.
Data about compensation is accessible. Glassdoor has provided salary data for more mature organizations. AngelList provides benchmarking for salary and equity for startup companies.
More than half of the young people say equity compensation was the main reason they took their job.

It is important for leaders to understand and articulate how equity is determined. Let's start at the beginning.

An ownership mentality is good for both business and morale, which is why many founders choose to allocate some level of equity beyond leadership roles. A team is needed to execute the vision of the leaders.

Think strategically, think ahead, and communicate, make sure you offer the right equity allocation, for the right strategic reasons, and to achieve the right goals.

You should design your equity program.

It is time to design your equity program once you have decided stock options are going to be a part of your rewards package.

The equity pool should be sized.

The size of your employee option pool is the first thing you need to determine. If your hiring plan is disconnected from the creation of a larger option pool, you will want to formulate your thoughts prior to the discussions with investors.

It is important for leaders to understand and articulate how equity is determined.

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