How to Split Equity in a Company

How To Split Equity In A Company

By : Raad Ahmed

April 2015

IT’S MINE NOW!EVERYTHING ABOUT STARTUP EQUITY

BROUGHT TO YOU BY

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IT SEEMS LIKE YOU’RE ON THE RIGHT TRACK…

AND YOU ARE STARTING TO HIRE EMPLOYEES…

HOW TO COMPENSATE THEM?

WITH SALARY AND…

EMPLOYEE EQUITY!

THERE ARE 3 MAJOR ISSUESBut nothing that you couldn’t handle with a little legal help

PROBLEM 1: HOW MUCH TO GIVE?Both founders & employees deserve a premium on their risk

SOLUTION A: EQUITY FORMULAMath approach to people problem

by Paul Graham

HOW DOES IT WORK?

n = (i-1)/in - value of a new employeei - how much a new employee will help the company (eg. increase

SOLUTION B: SEGMENTATIONBusiness approach to people problem

HOW DOES IT WORK?

Put your employees into segments

Segment 1 Segment 2 Segment 3

First 10 employees

Aggregate 10% compensation

Employees 10-25

Aggregate 5% compensation

Employees 25-50

Aggregate 5% compensation

Those exact numbers will vary depending on a situation, but this concept ensures quite fair equity distribution

PROBLEM 2: WHEN TO GIVE?Equity should be motivating, so let’s not release it all at once

SOLUTION: VESTINGA plan for giving out equity compensation

HOW DOES IT WORK?

Vesting is a schedule, that plans when

Employee will gain rights to all his shares after a set amount of time

Motivation behind vesting is for the shares to be an ongoing motivator for an employee

COMMON VESTING PLAN4 years of vesting + 1 year cliff

This should be changed to serve individual situation

PROBLEM 3: AVAILABILITYSometimes exercising equity rights can be problematic

SOLUTION: LONG EXCERCISE WINDOWS

HOW DOES IT WORK?EXERCISE WINDOWS IS A TIME WHEN AN EMPLOYEE CAN

EXERCISE HIS EQUITY RIGHTS

PROBLEM = TAXES

Exercising equity rights means income, which means taxes have to be payed

Often more than the employee has

SOLUTIONAllow employees to exercise equity rights for

10 years after those are granted

SO WHAT TO DO NOW?

VISIT

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