Employee Equity for Early Hires: How Much to Give and How to Structure It

Your first hires are taking a real risk.

They are joining a company that might not exist in two years. They are leaving stable jobs for lower salaries and uncertain futures. They are betting on you before there is much evidence you are worth betting on.

Equity is how you compensate for that risk. It is also how you align their incentives with yours. When the company wins, they win.

But most first-time founders have no idea how much equity to give, how to structure it, or how to have the conversation. They either give away too much too early, or they lowball good candidates who walk away.

This guide covers how to think about employee equity at pre-seed and seed stage: what is fair, how to structure it, and how to avoid the mistakes that create problems later.

TL;DR

• Early employees take real risk and deserve real equity
• Typical ranges: 0.5% to 2% for early hires, depending on seniority and stage
• Always use vesting. Four years with a one-year cliff is standard
• Stock options are most common. Restricted stock can work for very early hires
• Set strike price with a 409A valuation to avoid tax problems
• Be transparent about what the equity could be worth, and what it probably is not
• Get the paperwork right. Verbal promises create lawsuits

Why Early Employees Get Equity

Equity is not a gift. It is compensation for risk.

An engineer joining Google gets a good salary and some stock. But Google is not going anywhere. The risk is low, so the equity is modest.

An engineer joining your pre-seed startup is taking a different bet. The salary is probably below market. The company might fail. The product might pivot three times. They are giving up stability for the chance that this thing works.

Equity compensates for that gap. It says: "We cannot pay you what you are worth today, but if this works, you will share in what we build."

It also aligns incentives. Employees with meaningful equity think like owners. They care about the company succeeding, not just about their job.

How Much Equity to Give

There is no formula, but there are ranges that reflect market norms. These vary by stage, role, and seniority.

Very early hires (pre-seed, first 1-5 employees):

• Senior engineer or technical lead: 1% to 2%
• First sales or GTM hire: 0.75% to 1.5%
• First designer: 0.5% to 1%
• Generalist or operations: 0.25% to 0.75%

Seed stage hires (employees 5-15):

• Senior engineer: 0.5% to 1%
• Mid-level engineer: 0.25% to 0.5%
• Sales hire: 0.25% to 0.75%
• Designer or marketing: 0.2% to 0.5%

Post-seed hires (employees 15+):

• Senior roles: 0.1% to 0.5%
• Mid-level roles: 0.05% to 0.25%
• Junior roles: 0.01% to 0.1%

These are guidelines, not rules. Adjust based on:

• How critical is this role to your next milestone?
• How much salary are they sacrificing to join?
• What is their experience level and market value?
• How much risk is left in the business?

The earlier someone joins, the more risk they take, and the more equity they should receive.

Stock Options vs Restricted Stock

Most early employees receive stock options, not actual shares. Understanding the difference matters.

Stock options

An option gives the employee the right to buy shares at a fixed price (the strike price) in the future. If the company does well and the share price goes up, the option becomes valuable. They buy at the old low price and own something worth more.

Options are the standard for employees because:

• No upfront cost for the employee
• No immediate tax consequences
• Clean and well-understood structure

Restricted stock

Restricted stock means the employee actually owns shares from day one, but those shares are subject to vesting. If they leave early, the company can repurchase unvested shares at cost.

Restricted stock can be better for very early employees (first 1-3 hires) because:

• They own actual shares, not just options
• With an 83(b) election, they can lock in low tax treatment early
• Feels more like being a cofounder than an employee

The tradeoff: restricted stock requires the employee to pay for the shares upfront (even if the price is very low) and file an 83(b) election within 30 days. Miss the 83(b) and the tax consequences can be severe.

For most hires after the first few, stock options are simpler and safer. Use restricted stock only when someone is joining very early and you want them to feel like a founder, not an employee.

ISOs vs NSOs

If you are issuing options, you will encounter two types: ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options).

ISOs

• Only available to employees (not contractors or advisors)
• Better tax treatment if held for required periods
• Subject to limits ($100K per year exercisable)
• More complex rules

NSOs

• Available to anyone (employees, contractors, advisors)
• Taxed as ordinary income on exercise
• Simpler rules
• No holding period requirements for tax treatment

For most early-stage companies, ISOs are preferred for employees because of the tax advantages. But the rules are complex enough that you should work with a lawyer or use a platform like Carta to get it right.

Vesting: Same as Founders

Employee equity should always vest. This protects everyone.

Standard terms: four years with a one-year cliff.

• Nothing vests for the first 12 months
• At month 12, 25% vests at once
• Remaining 75% vests monthly over the next 36 months

If someone leaves after six months, they get nothing. If they leave after two years, they keep half. This ensures equity goes to people who stick around and contribute.

Some companies use three-year vesting for employees. This is becoming more common but is still less standard than four years.

Do not skip the cliff. Without it, someone could join for three months, leave, and still own a piece of your company. The cliff exists to protect against short-term hires walking away with equity.

For more on how vesting works, read founder vesting explained.

Strike Price and 409A Valuations

The strike price is what the employee pays to exercise their options. Setting it correctly matters for tax reasons.

If you set the strike price too low, the IRS can treat the difference between the strike price and the actual value as taxable income. This creates problems for the employee and the company.

To avoid this, you need a 409A valuation. This is an independent assessment of your company's fair market value. It gives you a defensible strike price that the IRS will accept.

When to get a 409A:

• Before issuing your first options
• After any funding round
• After any major milestone that changes company value
• At least once per year

409A valuations cost anywhere from a few hundred dollars (for early-stage companies using automated services) to several thousand (for more complex companies using traditional firms).

Do not skip this. The cost of getting it wrong is much higher than the cost of getting it done.

A note on geography:

The rules above (409A, 83(b), ISOs) are US-specific. If you are a UK company, the landscape is different:

• EMI options are the UK equivalent of ISOs, with favorable tax treatment for employees
• You need HMRC valuation (not a 409A) to set your strike price
• There is no 83(b) equivalent, but there are different rules around restricted stock and employment taxes

If you are UK-based, work with a lawyer who understands EMI schemes. The mechanics are different, but the principles in this guide (vesting, fair pricing, proper documentation) still apply.

The Equity Conversation

Talking about equity with candidates can feel awkward. Most people do not understand how startup equity works, and there is a lot of room for misunderstanding.

Be transparent about:

• How much equity you are offering (percentage, not just number of shares)
• The current valuation or stage of the company
• The vesting schedule
• What the equity could be worth in different scenarios

Do not:

• Promise specific outcomes ("this will be worth $X")
• Hide the dilution that will happen in future rounds
• Use share counts to obscure small percentages
• Oversell the upside while hiding the risk

A simple framework:

"We are offering you 0.5% of the company. That vests over four years with a one-year cliff. At our current stage, the honest truth is this is worth very little today. If we hit our goals and raise a Series A, it could be worth something meaningful. If we become a big company, it could be worth a lot. But most startups fail, so there is real risk this ends up worth nothing. We are asking you to bet on us, and this is how we share the upside if it works."

Honesty builds trust. Candidates who understand the risk and join anyway are better hires than candidates who join expecting guaranteed riches.

Common Mistakes

Giving too much to early hires

Your first engineer is not your cofounder. Giving them 5% because you are excited will hurt when you need to hire ten more people and your option pool is depleted.

Stick to the ranges. Save room for future hires who might be even more critical.

Giving too little to critical hires

The flip side: lowballing a transformative hire because you are protective of equity. If this person is genuinely going to change your trajectory, pay up. A great VP of Engineering at 1.5% is better than a mediocre one at 0.5%.

Verbal promises without paperwork

"We agreed you would get 1%." Did you sign anything? Is it in the cap table? If not, it does not exist.

Every equity grant needs proper documentation. Stock option agreements, board approval, cap table updates. Do not rely on handshakes.

Not explaining dilution

That 1% you gave your first engineer will be less after your seed round. And less after Series A. Employees deserve to understand how future fundraising affects their stake.

You do not need to model every scenario, but you should explain that dilution happens and that their percentage will decrease over time (even as the value might increase).

Using share counts instead of percentages

"We are giving you 50,000 shares" means nothing if you do not say how many shares exist. Some companies use large share counts to make grants sound impressive when the percentage is actually tiny.

Better approach:

• Lead with the current fully diluted percentage at grant time
• Also show the number of options for the paperwork
• Be explicit that the percentage will shrink after future rounds

"We are offering you 0.5% of the company, which is 50,000 options at our current share count. That percentage will dilute as we raise future rounds, but the value should increase if we execute well."

That is honest and complete.

Refresher Grants and Promotions

Equity is not one-and-done. As employees grow with the company, you may want to grant additional equity.

Refresher grants: Additional option grants for high performers, typically given annually or after major milestones. These help retain strong employees and offset dilution.

Promotion grants: When someone moves into a bigger role, their equity should reflect that. A senior engineer promoted to VP of Engineering should receive a grant that brings their total closer to the VP range.

Build this into your thinking early. Your first engineer's 1% made sense when they joined. Three years later, after two funding rounds and significant dilution, it might make sense to top them up.

What Happens When Employees Leave

When an employee leaves, their vested options typically remain exercisable for a limited window, usually 90 days. After that, unexercised options expire.

This can create difficult situations. An early employee who helped build the company but cannot afford to exercise their options (and pay the associated taxes) may lose them entirely.

Some companies extend the exercise window to 5-10 years for long-tenured employees. This is employee-friendly but has accounting implications. One important detail: if you extend the post-termination window for ISOs beyond 90 days, they typically convert to NSOs for tax purposes. Employees should understand this before assuming extended windows are purely upside.

Decide your policy before it becomes an issue.

Unvested options are forfeited when someone leaves. They return to the option pool for future grants.

The Mechanics: What You Actually Need to Do

Before you can grant equity to employees, you need the infrastructure in place:

• Adopt an equity incentive plan (your lawyer creates this, board approves it)
• Get board approval for each grant (or delegated authority to the CEO for grants under a threshold)
• Update your cap table after each grant
• Have employees sign option agreements with all the terms (vesting, strike price, exercise windows)
• File any required tax paperwork (409A in US, HMRC valuation in UK)

This sounds like bureaucracy, but skipping any step creates problems later. Investors will ask for your cap table and option plan during due diligence. Employees will want signed paperwork before they trust verbal promises.

Set up the infrastructure once, then each new grant is straightforward.

Where to Go From Here

Understanding the full equity picture? Read startup equity explained

Setting up your cap table? Read cap table basics

Splitting equity with cofounders? Read how to split equity between cofounders

Setting up founder vesting? Read founder vesting explained

Closing Thought

Your first employees are not just hires. They are believers.

They are joining before there is proof you will succeed. They are taking lower salaries, higher risk, and betting their careers on your vision.

Equity is how you honor that bet. Give enough that they feel like owners. Structure it properly so everyone is protected. Be honest about what it could be worth and what it might not be.

The best early employees become the backbone of your company for years. Treat their equity like what it is: a partnership, not a perk.

Get it right, and you build a team that is aligned, motivated, and in it for the long haul. Get it wrong, and you create resentment, turnover, and legal problems.

The details matter. Do the work.