How much equity should I set aside for future employees, contractors, advisors, and others?
Typically high-growth startups informally set aside around 2 million shares for future common stock grants. Approximately 1 million shares are informally set aside for grants to future hires and contractors out of an Equity Incentive Plan. Another 1 million is left as a buffer just in case additional common stock needs to be issued prior to the company’s preferred stock fundraise.
A little more on the Equity Incentive Plan
Most preferred stock investors require the creation of an equity incentive plan to compensate future employees. The investors will require the plan to be established prior to making the investment. The size of this plan is generally determined once the company starts hiring employees and should be tailored to the company’s long-term hiring needs. In order to formally set up the equity incentive plan, the board and shareholders will vote to “reserve” some amount of unissued and authorized shares to the plan. Reserving shares is another formal process whereby those shares can only be used in connection with the equity incentive plan. Setting aside enough shares initially will help make establishing the equity incentive plan less costly and time consuming when the company is ready.
Last updated on April 2, 2019