Offering ownership of your startup can make the difference in securing an innovative and dynamic team for your startup. EMI schemes are inherently flexible and the conditions, requirements and timings of the scheme are largely down to the issuer to agree.
An EMI can be structured such that it becomes disadvantageous for employees to leave, particularly if the EMI makes up a material proportion of their reward package. Motivation — Employees of your startup may feel more engaged and loyal if they are enrolled in an EMI scheme. Being an owner gives them a sense of being more than just an employee. This provides a powerful motivation and feeling of job security. Especially so if the EMI has performance conditions attached.
Taken altogether there are compelling reasons to make your employees owners. Having your team feeling more connected to your long term business goals can be highly valuable, particularly when combined with increased loyalty and motivation. These early-stage employees will help drive your success through innovation and perseverance and aligning their interests with those of your startup can only be a positive thing.
The EMI provides two-way benefits however and the potential rewards for employees can be significant, which is why it is such a powerful motivator. Knowing the reasons why equity share schemes can make a difference to your startup is a good place to start, but if you decide an EMI is for you, how much of your equity should you make available?
Equity should never be given away lightly. This begs the question; how big a share of equity should be made available to an EMI scheme?
The amount of equity to be made available is usually referred to as the option pool. Deciding on the size of the option pool can be a complicated process.
During pre-seed and seed funding stages the future of the startup has to be considered and balanced with the needs of the founders and key team members. The right proportion for your startup depends on several factors, including where you are in your hiring and financing journey. Typically between seed to series A funding an option pool of 7. As funding rounds progress this proportion can change and should be reviewed periodically to ensure it is cogent with the hiring and retention strategy of your startup.
An important consideration, to be discussed in more detail below is how many employees are you making the scheme available to. If the scheme is broad then the option pool will need to increase as your startup matures and the number of employees grows. In a perfect world, the option pool should meet the needs of the current team while being sufficient for any anticipated future hiring. For example, hiring top talent early on may require more equity than at seed or series A rounds. Striking a balance is not easy and there are the conflicting interests of future and current hires to weigh against those of investors and founders, nobody wants their share diluted.
Individual employees are rewarded in line with the benefit and value they are expected to bring to the startup. In a pre-seed funding startup, employees are taking more of a risk than if they were to take a job at a more stable and established business. This risk has to be factored into the remuneration package being offered.
It has to be attractive enough to bring in the talent needed to do the early-stage foundational work, that will make your startup a success. Before series A funding, startups can afford to be generous to attract the right people.
It depends on the nature of the startup and the value that the individual brings to the startup. Imagine for example a startup that has plateaued and requires a technical expert to join them to drive a solution and move the company into growth, in this circumstance the right engineer is in a strong position to negotiate a large equity share. There are nuances to equity awards and there are too many to consider in this blog.
In broad terms you can consider average equity at series A funding to be:. These equity grants are based on the expected value that these people bring to the business. At the most senior levels, there is an expectation that the reward package will include a significant equity stake.
As your startup grows there will inevitably have to be a move away from individual equity grants and a decision made on whether all employees will be given access to the scheme. If so, the scheme will have to become generalised and rigid as opposed to the bespoke and flexible grants given early on. From series B funding onwards the equity awards if offered to employees at this point will be much smaller, in part because salaries can expect to increase as revenue grows.
It helps keep employees motivated with the tantalizing prospect of a big payday when the company is sold or goes public. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow?
What about that highly coveted VP of Sales brought on once a company has a product to sell? And what about others a young startup seeks to enlist in the cause, including key advisors whose insights and connections might increase its chances of success or perhaps an outside director with the right expertise to join a nascent board of directors? Properly parceling out equity is a challenge for first-time founders. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number.
You have to look at each situation individually. Yet while complex, several online guides provide compensation benchmarks that help founders think about the size of each slice of the company they give away when recruiting talent.
Generally, there is a range of value that depends on the exit options the business is considering. Determining equity valuation is further complicated by human resources and legal concerns that may occur during discussions of equity valuation between company founders and their employees. Legal professionals often advise company founders to be very cautious about having that discussion.
The value of equity may be diluted when the total amount is divided among many people. A company founder begins by owning all shares representing complete ownership of the company.
As time passes, other parties obtain pieces of equity as compensation for work e. As equity is calculated as a total percentage of ownership, it will always total exactly percent. To turn an ambitious idea into a real company, a startup team needs two key things among others :. While you can learn about how to benefit from startup mentoring and get valuable advice for your business from another article , here we will explain the basics of equity in a startup.
Read on to learn more. Unlike companies with predictable cash flows and valuable physical assets, startups have little chances of getting a loan if at all and not getting into trouble. So, a startup can get the first money in these two ways:. In brief, bootstrapping suits startups which do not need a lot of capital to build and test their product. Thus, a team can rely on money from personal savings and revenues from the first sales. VC investing is rather for startups who aim to shoot far, need a lot of money, and are confident enough to make VC investors believe in them.
Finally, angel investors are usually high net worth people who help startups with their own money at early stages. Thus, investors will be given not only ownership but also rights to the potential profits of the startup. It is usually distributed in the form of stock options.
As a startup succeeds, all its subsequent investors will be willing to pay more per share in the next rounds of funding. This is one of the factors that motivate startups to grow. Now, who are these investors? Are they only VC investors or can those be employees? Find the answer below. In general, four main groups of actors can get startup equity:. The most typical case is when ownership is shared in percentages between co-founders. Different startups may have different combinations of these four categories.
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