One of the most critical decisions a startup founder makes is how to allocate equity among employees, consultants, and advisors. Equity compensation is a powerful tool for attracting top talent, aligning incentives, and ensuring long-term commitment. However, many founders make mistakes in equity distribution, often by miscalculating shares or giving away too much equity too early.
In this post, we’ll break down:
✅ Equity benchmarks for employees, consultants, and advisors
✅ Common mistakes founders make when issuing equity
✅ How to structure equity grants to ensure fairness and transparency
While every startup is unique, equity distribution generally falls within these ranges:
🔹 Senior employees: 1-5%, we generally see 1-3% for senior employees, other than in the very early stages when you may have to go up to 5%. Grants of 5% and higher are considered “founder equity” and we don’t discuss it in this post. Typical vesting for employees is 4 years.
🔹 Regular employees, consultants & Advisors: 0.1% to 1%, depending on their role and contribution level. Typical vesting for advisors is 2 years, while for Board members—4 years.
🔹 Equity Incentive Plan (EIP) / Option Pool: Typically 10-20% of the company’s fully diluted shares. A 20% pool is on the higher end but may be justified if you plan to actively recruit top talent. We recommend setting the option pool based on a clear forecast of your hiring needs and planned equity allocations. For founders, it’s often preferable to keep the pool smaller and increase it at each round to spread the dilution across investors as well.
These percentages should always be considered on a fully diluted basis, which we’ll explain below.
Benchmarking data, while commonly used, is often flawed. It relies on small datasets and fails to capture context, reducing equity decisions to a one-size-fits-all approach. Instead, founders should consider building an equity budget to manage their grants effectively. Your option pool should be viewed as a maximum spend, not a target—similar to managing cash burn. We recommend keeping 25-35% of your pool in reserve for flexibility in unexpected hires or higher-seniority recruits.
To start, answer these key questions:
This approach suggests using a structured multiplier system for equity grants, which founders can customize based on hiring needs.
For a more detailed breakdown, check out this guide, which includes a calculator to help you structure equity grants for early hires effectively.
Many founders issue the wrong number of shares to employees.
Why? Because they calculate equity incorrectly.
When you promise an employee, advisor, or consultant X% equity, how are you calculating it? Are you basing it on:
Our preferred way to structure grants is to offer a concrete number of shares based on a fully diluted basis.
Fully diluted shares account for:
✅ Issued stock
✅ Issued options
✅ Warrants
✅ Options reserved in the stock option pool
In other words, it assumes that the entire option pool has been granted and that all options have been exercised.
Let’s say your startup has:
Now, you hire an employee and grant them 90K options.
The number of options stays the same, but the perceived percentage changes. This can impact how attractive the offer seems to a candidate.
Notice that the 10M authorized shares were not included in the calculations because this number does not matter for this purpose.
Early on, many founders give out excessive equity because they don’t yet know the value of their company.
For example:
While equity is an important tool for attracting talent, founders should be strategic and reserve enough for future hires, investors, and growth.
✔️ Be clear on percentages and calculate equity on a fully diluted basis.
✔️ Use an equity budget rather than relying solely on benchmarking data.
✔️ Offer a specific number of shares, not just a percentage.
✔️ Be mindful of over-granting equity early on—equity is valuable and should be allocated wisely.
✔️ Follow structured equity planning—consider vesting schedules, risk levels, and long-term needs.
✔️ Use a strategic approach—set aside enough equity to sustain hiring without excessive dilution.
For hands-on legal support in structuring and managing your startup’s equity, check out our Lexsy Fractional GC Subscription.
Also, don’t forget to grab our Free Equity Issuance Checklist to ensure legal compliance when granting equity.
By getting equity right from the start, you can attract the best talent, keep your cap table clean, and avoid major headaches down the road. 🚀
