There Are Never Enough Stock Options To Go Around

Q:  What amount of share options is fair?

Boy this is a tough question.

Options are rarely worth as much as anyone expects, unless the start-up is worth $10b+.

One big problem: the pie only adds up to 100%. That sounds silly, but it isn’t. You literally can’t give everyone as much as you want, especially after the very early days.

Here’s a more practical way to think of it: each year of a start-up generally leads to 5%-7% dilution. That’s your budget. Max.  In the old days, VCs would always add a 20% option pool to their term sheets.  Why?  Well they wanted the options to last 24 months at least, and up to 36 months.  That’s 20% dilution over 3 years from option grants… so a 20% option pool.

So that’s how much there is to hand out?  Well, here’s what you’ll have budget for:

• If it’s Year 1, and you are hiring 2 or 3 folks, then you can split 5% across all of them if you want.
• If its Year 5, and you are hiring 50 folks, that’s 5% max to distribute to 50 folks.
• If its Year 7, and you are hiring 300 folks … that 5% gets spread mighty thin.
• And really, you have a lot less than you might think because this 5%-7% includes “expensive” VPs and other senior folks. They’ll generally consume 50% or more of the options available that year.  So you only have half that annual budget for all your non-VPs.

There just isn’t that much to go around.  Especially for non-VPs.  Hire 2-3 VPs a year, with say 1% each in the earlier days, and that’s half your entire dilution budget right there.

So what can you do?

• Be relatively fair. Create bands, stick to them. Don’t allow bias to slip in.  Make sure when you do make exceptions, there are fair reasons for them.
• Get extra options to your top 10% performers. They more than deserve them.
• Review the option list at least annually. Look for folks that haven’t gotten enough vs. where they are today. Fix that.
• Later, do a Black-Scholes analysis and share it with grantees. Online tools can help a lot here. You can aim to provide folks 1x-5x their salary if growth targets are hit. This will help people understand later-stage grants better.

It’s tough if you care about the team. They won’t be able to get “enough” options in the early days. You just have to do your best here. The pie only adds up to 100%.

Still, in the early days, here are the classic guidelines:

• VP:  1%, less for stretch, more for proven veteran.
• Director: 0.1%-0.2%.  On relative basis to VP
• Top Individual Contributor:  20%-50% of a Director, depending on value to org.
• First Year Employee:  2x what an ordinary employee would get.  Maybe 3x.