What could be a reasonable stock compensation methodology for a non-founder early employee in a startup?

First, I love this line: "I'd warn against trying to any kind of "market rate" discount equivalence kung-fu early in the company". Thanks Steven Willmott, Second, I can truly appreciate your effort to create a "fair" equity compensation programs in an early stage company. Unfortunately the variables involved, both short and long-term, are huge. Trying to match grant sizes to missing dollars of base pay sounds great, but it doe not work in a practical world.  You would have to account for current values, mathematically modeled future values, and best-case project future values...and you would have to be right. I work with a lot of companies on this exact issue and I start with: What are you trying to accomplish as a company? (potential time-frame(s), potential liquidity event, who will be your eventual competitors or acquirors? etc.) What do you want your company culture to be? (Focused on product  delivery, or innovation, or profitability, Focused on individual performance and dynamics, focused on team or company performance and dynamics, passion for the company vs passion for the end game etc.) BTW,  this can be a difficult one What do you want your company compensation philosophy to be? (we want to pay "OK" and create owners, we want to pay "OK" and reduce potential future ownership, we want to leverage our staff to get to our three goals as quickly as possible even if that almost kills us, etc.) Do you want to hire a few superstars in the first ten people, or do you want to hire stars for the first 30, or GREAT people for the first 60-100? And how many staff members will it take to really get the company moving? Some companies can succeed with a core of 5-7, some need a core team of 25-35, others need at least 50-100 to design and build their products. Where are you located and will you hire local talent or bring in talent from outside the area? I have also created a document titled: "Top 11 things for Private companies to consider before using stock options and equity comp" available on http://slideshare.net. http://www.slideshare.net/performensation/top-11-things-to-consider-for-stock-options-and-equity-comp The answers to these questions will shape the conversation on how to deliver equity.  Now, if you company is essentially very much like 20 other companies that currently exist, you can always just do what they do, but I find that most people start a company because they want it to be different and better than their peers.  These questions help you figure out what different and better mean and how they can be applied to paying your staff. James Patterson is right in that working for a true early-stage start-up requires a passion for the company and its success. The money thing is less of a focus for most until they have been working hard for 2-3 years for far less than they can make elsewhere.  Having a properly structured equity (or synthetic equity) compensation program early on can help reduce these issue in the future. So, on to some of my detailed thoughts. 1. I think Steve's suggestion of creating a reserve pool of 1025% for the first 1-3 non-founders is pretty high.  Unless you believe that you will exit before you get to 50 employees, this is a lot to give away so early, unless these people will bring in something more than they create. But, this could work, depending on the answers to my questions above. 2. Creating a philosophy of setting aside 20% of the company for employee equity is a good start.  When you are very early on, you may want to consider only authorizing 10% since the unused portion still shows up on your books.  You can increase the pool size as you progress. 3. Determine the likely value of the company at a potential exit.  Be brutally realistic.  Most companies will not be the next Facebook or Instagram, so use best cast achievable numbers. 4. Determine the size and makeup of the "core" team that will need to exist to create the foundation of your company. Consider allocating 5-10% to these people. Realize the the foundation is likely to include the first 10-20 employees. 5. After the foundation staff, do your best to stop talking about things in terms of percentage of ownership. Talking about these percentages seldom works out well. 6. Instead, talk about things in terms of potential value in the event you reach your desired end state (if possible). Try not to communicate values based on current stock price (which even the best valuation expert will tell you is a blatant guess early on).  Try not to talk about values in terms of "black-scholes", since these are even a bigger guess early on (and likely, later) 7. When you discuss compensation, focus the staff on how they will increase the value of their equity, not on how much it is, or will be, actually worth. 8. Realize that your company is and should be unique. All or none of the information above may apply to you. I work with companies of all size and industries and the end results can vary wildly from company to company.  The goal is not to get it "right".  The goal is to get it right for your company.

This is a very tricky thing to get right and probably varies a lot depending on where you're based. I'd warn against trying to any kind of "market rate" discount equivalence kung-fu early in the company - it seems alluring but in the end early on it's down to individuals and personalities - how much do you _really_ want someone. Besides market rates for individual people are themselves highly variable - is this dev's normal salary 80k/year or $180/year? Hard to say often. I think there's a pretty big difference between the following scenarios:  - the employees you're talking about are number 1-3 (or similar) after the founders (and there are not many founders) - meaning they are part of an early tight knit core.    - the employees you're talking about are #6/7+ into the company and the product/vision etc. is already well on track from the initial core of people. In the first scenario, while the individuals aren't co-founders they will have a massive influence on product and outcomes - I don't think there are really any formulas here - you have to make judgements on how replaceable such people would be. In the second category you can probably start applying some rules of thumb. The second major variable is the status of the company - is the product ready (and/or live), have you raised funding and are you able to pay (minimal) salaries for a period of time.  - someone coming in when there is little secure money on the table and the product is very raw/unlaunched is taking a lot more risk. It may not be "founder's risk" but it's high.  - someone coming in when there is an angel round in the bank and early traction has much more to rely on. (Note that you probably should not be doing hiring of the second type unless there is a solid finance plan in place.) Beyond the actual numbers though, the absolute most important things to do are to make sure the incentives are right:  * Make sure there is a long vesting period [4years minimum]  * Make sure there is a cliff [e.g. 1 year] These are so important because even someone who is great and loves the company may end up leaving for some reason - you need to protect the equity pool from having dead equity tied up in individuals that have left. I always hate answers on finance topics which give you high level answers and put no numbers on the table, so I'm going to throw some out there - which you should take with a big pinch of salt. Hopefully people will chime in and comment!  * For the first group of non-founders, employee #1-3 say, if they are coming in when there is still significant uncertainty, reserve total a pool of 10-20%. These are people who fill critical gaps in your founder skill set, you hope will help make the whole enterprise fly long term - they are people you never want to loose. If you're on the high or low end of this depends on how early it is and how much of the critical skill set you and your co-founders already cover. As you can see from the numbers it's possible that one or more of these individuals have 5%+  * For employees coming in "after" this I would say think in terms of 1% or less of the company. It's rare that they would be critical enough to really affect the outcome for you in the short and mid term. So you might end up with 15% for core/key employees, 5% for the next wave. Note that you can always also add more stock grants for high performers in the future - so one way to avoid people loosing motivation is keep downward pressure on initial allocations but be diligent about extra grants along the way. A total of 20% for employees at an early stage may seem a little or a lot to some people. However, it really depends on what you critically need to complete your core founder's skill sets. If you're not sure you need a function - don't hire it - hire slow and fire fast much smarter people than me have said!

The best methodology I've found that minimizes dilution for founders/owners while providing strong incentives and fairness is http://www.optionsanity.com.  I use this method in my company (http://www.emanio.com) and it far surpasses anything I've seen in my 20 years in tech.  It's a good and well thought through system that ensures that everyone in the company is focused on the same things.  Also, it remunerates top performers, ensures that people who come later (when the startup is less risky) receive less options than those who take a risk early. Contact me if you want more information - obviously I'm a very satisfied user.