Equity Compensation Planning
Compensation philosophy and practices can have a material impact on business outcomes, particularly when it comes to equity. Granting too few shares risks headwinds to recruiting and potential attrition of top talent, whereas granting too many shares can result in hundreds of millions of dollars of extra dilution to founders, current employees, and investors.
It is never too early to start thinking about compensation in a first-class way, whether you are still building out your first layer of leadership or hiring your 50th software engineer. You can codify and implement what you need today, and gradually add more structure over time.
Modeling your equity comp helps you compensate top talent appropriately, set proper expectations during fundraising rounds and avoid potential power dynamics that could arise when running out of option pool earlier than expected.
As our portfolio companies grow, we often get asked questions about equity compensation, such as:
- Who at our company should receive equity, and to what extent should higher performers receive more than lower performers?
- What is an appropriate amount of equity to give employees based on their role / seniority?
- How should we approach refresh grants for employees that are almost fully vested?
- Who should review employees' equity compensation and how often?
- At what point should we make the switch from options to RSUs?
We have found that there are three primary criteria for a successful Equity Compensation program:
- Value Creation for Employees: How much will employees in key roles make at a credible exit valuation, and is that number motivating?
- Company-level Dilution: How much will current shareholders (founders, employees, investors) be diluted over the next 5 years? Are you managing towards low single-digits annually?
- Option Pool Model & Budget: Can your existing option pool credibly last until your next fundraise? Do enough shares exist to cover your equity comp needs?
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