Startup Equity Compensation: The Complete 2025 Guide

Equity is the secret weapon that lets startups compete with Big Tech for talent. A senior engineer might take a $100K pay cut in cash if they believe the equity could be worth millions. But most founders do not know how to structure, communicate, or manage equity effectively. The result is confused candidates, inconsistent grants, and missed hires.

Here is everything you need to know.

Understanding Your Equity Budget

Option Pool Basics

Most startups create an employee option pool of 10-20% of the company at formation or at each funding round. Investors typically require that this pool is created before their investment, which means it comes out of the founders' ownership, not the investors'.

A common mistake is creating too small a pool. If you plan to hire 30 people before your next round, and your pool only has room for 20, you will either need to be stingy with grants or go back to your board to increase the pool, which dilutes everyone.

Rule of thumb: Plan for four to five years of hiring in your option pool. If you are raising a Series A with plans to grow from 10 to 50 people, you need a pool that can accommodate 40 hires at appropriate grant sizes.

How to Think About Grants

Stop thinking in percentages. Start thinking in potential value. Here is why: telling a candidate they will get 0.1% of the company is meaningless without context. But telling them those options could be worth $500K-2M at a reasonable exit is compelling.

The formula is simple. Take the number of shares, multiply by the difference between the potential exit price per share and the strike price, and you have the potential value. Run this at multiple exit scenarios: 2x the current valuation, 5x, and 10x.

Grant Sizes by Role and Stage

Seed Stage

At the seed stage, equity is your primary currency. Cash is limited, and the risk is highest, so grants should be the largest.

• First engineering hire: 1-2% of the company
• First business hire: 0.5-1%
• Early employees number 5 through 10: 0.25-0.75%
• Advisors: 0.1-0.25% with a two-year vest

Series A

After your Series A, the company has been de-risked somewhat. Your valuation is higher, which means smaller percentages can still represent significant value.

• VP or Director level: 0.25-1%
• Senior individual contributors: 0.1-0.25%
• Mid-level hires: 0.05-0.1%

Series B and Beyond

At this stage, your equity has real, quantifiable value. Grants get smaller in percentage terms but can still be worth hundreds of thousands of dollars.

• C-level executives: 0.5-2%
• VPs: 0.1-0.5%
• Directors: 0.05-0.15%
• Senior individual contributors: 0.02-0.08%

Vesting and Terms

Standard Vesting Schedule

The industry standard is four-year vesting with a one-year cliff, followed by monthly vesting. This means the employee earns nothing if they leave before one year, receives 25% at the one-year mark, and then vests the remaining 75% monthly over the next three years.

This standard exists for good reasons. Use it unless you have a compelling reason not to. Candidates understand it, lawyers are comfortable with it, and it provides the right balance of retention and fairness.

Variations Worth Considering

Early exercise with 83(b) election. This allows employees to exercise their options before they vest, potentially saving significant money on taxes. It is especially valuable for early employees when the strike price is very low.

Extended post-termination exercise period. Standard stock options expire 90 days after leaving the company. This forces employees to make a major financial decision during what is often a stressful time. Some companies now offer extended exercise windows of two to ten years, which is more employee-friendly and can be a recruiting advantage.

Acceleration on change of control. Single-trigger acceleration means all options vest immediately when the company is acquired. Double-trigger means options accelerate only if the employee is terminated within a certain period after acquisition. Double-trigger is standard and preferred by acquirers.

Refresh grants. Do not forget about retention. Top performers should receive additional equity grants every one to two years. Budget for this from the beginning.

Communicating Equity Value

What Candidates Want to Know

Every sophisticated candidate will ask these questions. Be prepared to answer them clearly and honestly.

• How many shares am I being granted?
• What is the current strike price?
• What is the total number of fully diluted shares?
• What was your most recent 409A valuation?
• What was the last funding round and at what valuation?
• What is the post-termination exercise period?

Framing the Conversation

The best way to discuss equity is with scenario analysis. Show the candidate what their options could be worth at various outcomes.

For example: We are offering you 50,000 shares at a strike price of $1. At our last valuation, each share was worth $10, so this grant has a current paper value of $450,000. If we achieve a 5x return from here, those shares would be worth $2.25M before taxes.

Be honest about the risks. Not every startup succeeds. Most do not. But for candidates who believe in the mission and the team, equity represents a chance at an outsized outcome that salary alone can never provide.

Common Mistakes

Using Percentages Instead of Share Counts

Percentages dilute with each funding round. If you promised someone 1% at the seed stage, that might be 0.5% after Series A and 0.3% after Series B. This leads to confusion and resentment. Always communicate in share counts and potential dollar values.

Not Budgeting for Refresh Grants

Your best performers will expect additional equity after their initial grant is substantially vested. If you have not budgeted for refreshes, you will either lose good people or scramble to find shares.

Inconsistent Grants for Similar Roles

When two engineers doing similar work compare notes and discover one received twice the equity, you have a morale problem. Document your equity philosophy and apply it consistently.

Over-Granting to Early Hires

It feels generous in the moment, but giving your first five employees 2% each means 10% of the company is allocated before you have really started hiring. Save room for the VP of Engineering, Head of Sales, and other critical hires you will need later.

The Bottom Line

Equity is powerful when used well. Be transparent about what you are offering and why. Be consistent across similar roles. Help candidates understand the potential value. And budget for the long term, because the hires you make two years from now are just as important as the ones you make today.