How much equity should I set aside for refresh grants?

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One drawback of stock options is that, unlike salary, they ultimately stop vesting, after which point, an employee is entitled to exercise the entire grant. Companies must grant additional equity if they want to ensure the employee continues to vest beyond the end of their initial grant.

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The concept of needing to “refresh” employee equity can feel like a nebulous concept, given that employees are continuously joining your company. How much equity will you need to grant each year to continue motivating them to add value?

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Fortunately, you already have the data to model out a potential equity refresh program. Every equity grant you award comes with a vesting commencement date, as well as a vesting schedule. With those two pieces of information, you can build a monthly vesting schedule for every grant you have ever awarded.

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Once your schedules are built, you can sum up monthly vesting for every employee at the company, and quickly see when each of their vesting rates “drops off”, and by how much. Do they drop to zero? Have they already received multiple grants that sustain a proper vesting rate beyond the final vesting date of their initial grant?

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Now that you are able to consider each employee across all of their grants, you can test out various equity refresh program “policies” such as:

• What should a target vesting rate be for a given employee, relative to their pre-dropoff vesting rate? (hint: this should be a reduction from the old vesting rate, on average)
• How far in advance of a given employee’s dropoff should they be considered for a refresh grant? (waiting too long can make employees nervous that they won’t get more equity; granting too early locks up unnecessary shares far off in the future. 1-2 years before dropoff is a good starting point)

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You can now use simple math to look at the total equity vesting in a given year for an employee, calculate the “baseline” vesting rate implied by your “target vesting rate percentage”, and determine how many additional shares you would need to keep the employee vesting at that level. For example:

• Emily is vesting 10,000 options in 2024; 2,000 in 2025; and 0 in 2026.
• You have set your “target vesting rate percentage” at 50%.
• Emily’s “target vesting rate” is therefore 5,000 options.
• In order to continue vesting at that rate through the end of 2026, you would need to grant Emily 8,000 options: 3,000 vesting in 2025, and 5,000 in 2026.

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You can repeat this process across all of your employees to get a ballpark estimate of how much equity you would need to grant in a given year’s equity refresh program.