Your First 10 Hires Should Share No More Than 10% of the Option Pool
Early grants do not fade away, and startups that overspend can end up clawing shares back from founders and investors.
First Round · What Early Stage Founders Should Know About Comp: The Rules To Break (And A Few You Should Actually Follow)Kaitlyn Knopp, a compensation expert who has designed pay plans for larger tech firms and now leads a startup that automates human resources work, has watched the same mistake undo young startups. Founders hand out large ownership stakes to land early hires, and then run out of shares to offer the people they need next.
It usually starts with desperation and a tight budget. “I see a lot of early founders who, because they're desperate for talent, come to the negotiation table and lay out a ton of equity, because oftentimes they can't afford a lot of cash,” Knopp says. Her counter is that cash-poor stretch is short-lived, and simply getting a slice of ownership in a young company is already a meaningful offer.
Her rule of thumb is blunt and easy to use. The first 10 hires, combined, should get no more than about a tenth of the employee ownership reserve, the pot of shares set aside for workers. That works out to roughly 1% each, on average, and even that can be aggressive.
“To give perspective, a very late growth stage company might give 1% to their newly hired CEO. So that is a lot of equity to offer to someone early,” she says.
The reason to hold the line is that early grants do not fade away as the company grows. Knopp warns founders not to assume those shares will dilute so much that they will hardly matter. She has worked with companies that handed out their entire option pool when they had only a handful of employees, and then had to take shares back from investors and founders to keep hiring.
Before your next negotiation, write down the cap. Reserve about 10% of the equity pool for the first 10, and remind yourself that any equity is a lot.
Questions people ask
What exactly is an option pool?
It is a block of company shares set aside to grant to employees, usually as stock options that let workers buy shares later at a set price. Boards create it early and top it up over time, and every grant reduces what is left for future hires. Investors watch its size closely because it affects their own ownership.
If equity is so precious, why not just pay higher salaries instead?
Most early startups cannot, because cash is limited and salaries must be paid every month whether the company succeeds or not. Equity costs no cash now and only becomes valuable if the company grows, which ties the employee’s reward to building value. The risk is overcorrecting the other way and paying startup salaries so high that people have little reason to care about the stock.
What happens if a startup has already given away too much?
It has to create more shares, which usually means asking the board and investors to expand the pool and accepting dilution for everyone, including founders. In tight cases, that can mean renegotiating ownership and taking back unvested shares, which is painful and distracting. It is far easier to start with a cap and smaller grants that can be increased later for strong performers.