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[Music] how much equity should you give your first set of employees this is more art than science unfortunately there's no chart i can point you to where you can look up the number of employee and experienced and get an exact figure
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that's not how it works what i can do is give you a couple rules of thumb that will help you think it through the first one which is obvious but we're saying anyways is that early employees should get more equity than employees that join later this is really for two reasons
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one they're taking a bigger risk joining your small startup whose future is very uncertain and second they're going to be working their tails off in probably what's certain to be a pretty hectic environment and so they should be compensated for
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both that risk and that effort people that join later after you're profitable or once you're well funded aren't taking that big of a risk and they're likely walking into an environment that's a little more structured uh than early on so suffice to say the first employee
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should get more equity than the 20th employee who should get more than the hundredth employee the second rule of thumb is that startups traditionally set aside between 10 and 20 of their equity for incentivizing their employees if you
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raise money from a venture capitalist they'll insist on you creating this pool of equity before they invest in you now 10 on the low side and 20 on the high side of that pool that might seem like a lot but it goes pretty quickly especially when you start thinking about
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the number of people you're going to need to bring in to help you grow your business if you have to bring in an outside ceo that person would traditionally get roughly five percent of the company an outside cto or coo would get roughly three percent
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so as you can see it adds up pretty quick so before you begin distributing equity to anyone even your first employee you should think through how many people you need to bring in who they are and what you think you'll use from an equity standpoint to compensate them
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only then can you begin distributing now the first employee traditionally gets between one and two percent that person at least for a traditional silicon valley startup is usually an engineer if you go online you'll see ranges anywhere as low as half a percent
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all the way to you know three percent now there's a couple of considerations when kind of setting that range the first is how much cash do you have on hand right when you're starting a startup cash is a scarce commodity and some sometimes it makes a whole lot
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of sense to pay a little bit less in salary in exchange for a little bit more equity now not every employee or potential employee can make that exchange but it's one that's worth considering and having a conversation about now the second consideration is how much
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does that potential employee value equity you know some people are more conservative by nature and they value kind of the the surety of a salary versus the uncertainty of equity you know and your job is to bring someone on board and keep them motivated
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so use the tools that motivate them and in this circumstance maybe kind of use the lower end of the equity and the higher end of salary when compensating that person and lastly just remember the vast majority of startups fail and only a very very small percentage
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become big financial successes so i encourage you when thinking about equity is don't think of it as a fixed pie which is meant to be divided but rather as a tool that's going to increase your chances or your likelihood of being one of those few big financial
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successes it's in your best interest to make sure that the early employees have a really strong sense of ownership of the company you're going to be working with them shoulder to shoulder for really long hours right and they're going to play a really
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large role in determining the outcome of your company i've worked in silicon valley for 30 years now and i've yet to talk to a successful entrepreneur who said that they were too generous with their early employees good luck building your startup