A Formula for Sizing Employee Option Grants — How Much Equity to Give

  • Hiring grant — based on the formulas laid out in the tool. This is the first and largest grant, generally vesting over 4 years.
  • Promotion grant — any time an employee moves into a new role, they should get an updated grant that reflects the new position. The spreadsheet has a calculator for this. The idea is to re-calc the old position and the new position at CURRENT levels, and then grant the difference.
  • Evergreen grant — you never want your employees to feel like they’ve “fully vested”. That takes away the drive to work for ownership. And people tend to start feeling fully vested well before they actually are. So I think you should start granting evergreen grants at year 2.5 on a 4 year vest, and each year thereafter. All equity grants should use the same formulas, where evergreen is a 25% grant of their position, with the same vesting schedule — typically a one-year cliff and 4 year vest. These stacking grants means there’s always more equity vesting and the staggering of cliffs helps to maintain alignment. See here for some additional details.
  • Awards / Strong Performers — I expected I would do more adjustments to the formulas when hiring, promotions, etc. But in practice I found the formulas to work great and preferred the simplicity of not deviating. The formulas worked, the amounts were justifiable at each level, and the world was clean. I never really liked the promise of some rock-star employee, especially if I didn’t know them well, getting extra when they came on. However, I love awarding strong performers. Having run sales teams, I believe in performance pay. I also believe in more public contests / awards. So any bigger award would also include equity. “Star of the quarter” awards got 1,000 shares. During annual reviews I would essentially round up evergreen numbers on star candidates, and then a few out of band things here and there.
  • “Nominal” salaries — In roles where you have many people in the same role but you have a wider range of salaries, I suggest using one “nominal” value of salary for the calculation. There are some valid reasons why someone in the same role but a different level of experience may get a higher salary. Maybe they live in a different locale, for instance. I think the equity grant should be the same across the role though. So set a nominal salary, run the calc, and use that number for everyone. No negotiations.
  • How often to update — If you raise capital, the numbers change. That’s an epoch moment where a new valuation is set — so all the calculations change. You need to get a new 409a to set the stock option strike price. Well, even if you don’t raise capital, you need to refresh your 409a every year. I think the same for your numbers if you believe the values have changed. It can stay flat, but also be realistic. Don’t be overzealous, conservative is better here.
  • Adjustments — As mentioned above, I ended up not using this much. There’s a push overall towards more transparency across the board with employees. Employees talk. The numbers get around. Keeping it formulaic and using nominal values makes things consistent. But, I also see the counter argument. There are reasons to offer more equity, like when an employee takes a lower than market salary, helping closing an important candidate, etc. There’s a column in the spreadsheet to add in an additional multiplier, like a 10% lift or even a deduction. Use with caution.
  • More on multipliers — When I first implemented the Fred Wilson methed, I quickly saw how out of date his original multipliers were. I played with some numbers and ended at about double his values. Over time, I compared my numbers with other companies and CEO friends, and found my numbers were pretty middle of the road. I was more generous with full programs on promotions and evergreen, which don’t seem to be as common, but my initial grants were not small while not overly generous either. Matt Cooper, CEO of Skillshare, wrote up a post with his numbers: see here. His numbers are higher than mine, especially at executive levels. The Bay Area and NYC have the highest numbers. I also have the knowledge of seeing numbers inside of bigger companies. I’ve seen middle executive packages with a multiple of 0.5–1.5x — so roughly in the middle of my suggested numbers of those of Matt. We are close, pick yours, and then stick with it.
  • But what about salary numbers? — I’m stuck on that! Yep, another set of hard problems. For this one though I’ve found there to be more data available than on the stock side. It won’t take long for you to get a handle on that.

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Josh is lifetime builder. Engineer turned entreprenuer turned businss coach. Founded three companies, hired hundreds, raised millions in capital.

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Josh Melick

Josh Melick

Josh is lifetime builder. Engineer turned entreprenuer turned businss coach. Founded three companies, hired hundreds, raised millions in capital.

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