Equity is often the golden carrot that startups dangle in front of potential hires. It’s not just a piece of paper but a share in the future potential of a company. For those joining at the early stages of a startup, this represents an opportunity to be a part of the growth and potentially reap significant financial rewards down the line.
Recent data from 2022 provides insights into the equity distributions for the first five hires at startups. This information is invaluable for founders trying to strike a balance between conserving their equity and attracting top-tier talent.
Initial Offers that Count
The median equity numbers offer a fascinating glimpse into what new hires might expect:
Hire 1: 0.96% equity
Hire 2: 0.44% equity
Hire 3: 0.25% equity
Hire 4: 0.20% equity
Hire 5: 0.18% equity
Digging Deeper into Distribution Tiers
While medians provide a middle ground, examining the distribution in a more granular fashion reveals interesting patterns. Take, for instance, the stat that 30.9% of first hires receive an equity grant falling between 1%-2.5%. This data point suggests that startups might be willing to invest more in their first hire, possibly due to the significant impact this individual might have on the business’s trajectory.
Reflections on the Data
The first hire often plays a pivotal role in the company. Their equity distribution is typically broader and more substantial than subsequent hires. In a case study, Dropbox's early employees played critical roles in its growth, with some even ascending to leadership roles. These individuals were appropriately rewarded with equity reflecting their contribution.
The Curious Case of the 0.75%-1% Tier. This is an interesting zone. Why are very few of the top five hires given equity in this range? It's conceivable that there are industry-specific norms or psychological barriers to offering just below 1% equity. There might be a perception that offers in this range are neither here nor there, leading to most founders rounding up or down.
As one moves down the list of initial hires, there's a notable reduction in equity offered. This trend could be attributed to the diminished impact each subsequent hire might have compared to the ones before. When Twitter was in its nascent stages, the initial team played diverse roles and held a more significant equity share compared to hires that came in later stages.
Factors to Consider when Offering Equity
Offering equity is a delicate art influenced by numerous factors:
Skillset & Contribution: Is the potential hire bringing a unique set of skills to the table? If a non-technical founder hires a CTO as their first hire, the equity offered might be on the higher side. Consider the case of Instagram: Kevin Systrom, a non-technical founder, initially offered substantial equity to his first key technical hire, Mike Krieger.
Connections & Network: Some hires bring along not just their skills but a vast network. Such connections can open doors to partnerships, funding, or even new clients. A prime example is Sheryl Sandberg joining Facebook. While she wasn't an initial hire, her vast experience and connections proved invaluable, warranting a significant equity stake.
Salary Adjustments: Often, startups might not be in a position to offer competitive salaries. In such scenarios, a higher equity can compensate for a lower wage. This balancing act between salary and equity is common in the startup ecosystem.
Location and Sector Bias
The data leans more towards the Silicon Valley area and the SaaS sector. This geographic and sectorial skew might not accurately reflect global trends or other industries. For example, startups in regions like Berlin or Singapore might have differing equity norms influenced by local ecosystems and market conditions. Please have a look at the key insight from GSER2023.
Conclusion
Deciding how much equity to offer is one of the most challenging decisions for startup founders. While data offers guidelines, each startup's unique situation demands a tailored approach. Founders should weigh the potential value a hire brings against the equity they're parting with. The process is undoubtedly more of an art than a strict science.
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