Quick & Dirty How-To: Employee Stock Option Allocations

A great question came up recently in discussion with one of First Round's CEOs: how much equity should I allocate for hiring my next round of employees? For a company that has raised a first institutional round of capital, this question is important not only when making competitive job offers, but also when calculating what size option pool the company will need before raising the next round of capital.

Stock option comparables are hard to come by, so I thought I should post what I dug up for our CEO. Here's the best quick and dirty breakdown that I was able to find, courtesy of Venture Hacks - the ranges are from two years ago, but they still seem about right given what I see in the range of cap tables hitting my desk.

"To allocate the option pool from the hiring plan, use these current ranges for option grants in Silicon Valley:

Title Range (%)

• CEO 5 - 10
• COO 2 - 5
• VP 1 - 2
• Independent Board Member 1
• Director 0.4 - 1.25
• Lead Engineer 0.5 - 1
• 5+ years experience Engineer 0.33 - 0.66
• Manager or Junior Engineer 0.2 - 0.33

"These are rough ranges – not bell curves – for new hires once a company has raised its Series A. Option grants go down as the company gets closer to its Series B, starts making money, and otherwise reduces risk.

"The top end of these ranges are for proven elite contributors. Most option grants are near the bottom of the ranges. Many factors affect option allocations including the quality of the existing team, the size of the opportunity, and the experience of the new hire."

If you'd like to get more precise information on total compensation (both cash and equity, by specific title), you can get very robust data from the Radford technical job survey. Survey data is free in exchange for participating in the survey, so you can't beat the cost if you're on a tight budget. If I remember correctly from my own founder days, their 'small company' compensation ranges were appropriate for 25+ employees but a little off-market for a seed company. So if you get hold of a Radford survey, you may want to swing some comp from the cash to the equity side if your startup is still seed-stage.

If anyone else has good comparables to share, please do post them in the comments.

Comments

[Nathan Beckord]

Christine this is a great post; I find myself referring back to it frequently.

Question: the ranges above are for a startup that has already raised Series A and is allocating the option pool. Have you seen a similar range set for a pre-Series A startup?

Would it be accurate to back into the math to estimate these ranges?

e.g., if a Lead Engineer in a post Serie-A startup gets 0.5 - 1%, and if we assume the investor got 30% in that round, would it be accurate to solve for the "pre series A Lead Engineer equivalent" (which would be .71 - 1.42%)?

(I ask because I have a startup that is seeking guidance on how to allocate equity to non-founder Lead, Sr. and Jr. engineers, and looking for benchmarks or rules of thumb). Many thanks!

[S]

I'm new at this - are these percentages out of the option pool, or percent of total equity?

[Galen]

Thank you for sharing this Christine. I know Nathan Kaiser at nPost.com is working on collecting similar metrics from startups.

[Jared]

This is a boring question, but does anyone know where to find an excel template to track employee stock options once they have been granted?

[Drew Knapp]

In the case of a small company, would the CTO fall into the same category of Lead Engineer, with between 0.5 - 1% ?

[FN]

If you haven't seen it already, check out CompStudy http://bit.ly/3usfP which has detailed data on startup compensation based on surveys of over 6000 startups.

[Brendan Davey]

For additional information regarding compensation/equity grant issues, do a search for the 2008 CompStudy for Technology, a great resource.

[Christine]

Venture Hacks must assume that the founder is the CTO. ;) My gut check is that CTOs are offered a similar equity range as COOs. Any experts out there who can opine?

[Kevin Marks]

Nothing for CTO? Interesting...

[Christine]

Worth noting on Board of Advisors grants: these are often made with just a 12-month vest, not a 48-month vest. When I advised Series A-level companies before going back to venture capital, advisory comp seemed to average ~0.3% for an advisory stint with a 12-month vest, or ~0.5% with a 24-month vest.

Board of Directors grants will also tend to have shorter vesting periods, typically 1-2 years for 0.5 - 1%.

In either case, the vesting period should correlate with the standard tenure for an advisor/director. The amount of the grant usually increases with a longer term, though not by an equal amount. (e.g., 2x the term is not necessarily 2x the grant amount.)

[Chris Yeh]

Two other notes:

1) Entry-level non-engineering hire: 0.1-0.2%
2) Board of Advisors: 0.1-0.2%