Building the company
Early compensation and equity
Early startups trade cash for upside. Use bands, standard vesting and honest dilution — not ad-hoc negotiation.
Early startups trade cash for upside. A senior engineer might take $40–80k less than a big-tech offer in exchange for meaningful ownership. That trade only works if the equity is real (clear grant, vesting, strike price, pool) and the company might become valuable.
Concept
Equity compensation for employees is usually stock options: the right to buy shares later at a fixed strike price set near fair market value at grant. Options typically vest over four years with a one-year cliff (nothing vested until month 12, then monthly or quarterly). Taxes and exercise live in employee equity.
Rough early-employee equity ranges
Orders of magnitude as of the mid-2020s (US, seed–Series A). Index Ventures' OptionPlan benchmarks for US seed averages (fully diluted ownership) look roughly like:
| Function | Senior | Mid | Junior |
|---|---|---|---|
| Engineering | ~1.0% | ~0.45% | ~0.15% |
| Product / design | ~1.0% | ~0.45% | ~0.05% |
| Business development | ~0.35% | ~0.10% | ~0.05% |
YC's rule of thumb is similar in spirit: be generous early — on the order of ~10% of the company for the first ~10 employees on a sliding scale (employee #1 much more than #10), with standard vesting. First engineers often land roughly 0.5–1.5% depending on seniority, stage and how "founding" the role is.
Cash bands move with market and location. Index's older published seed cash anchors (e.g. senior eng ~$120k in their table) are directionally useful but stale as absolute numbers — as of 2025–2026, Bay Area / remote US cash for strong early engineers is often higher. Use OptionPlan, Carta reports or your investors' comp surveys for the current year.
Example
Seed company, $8M post-money, 10% option pool. Senior product engineer as employee #3. Grant: 1.0% fully diluted, 4-year vest, 1-year cliff, strike $0.08/share after 409A. If the company later exits at $400M with no further dilution (unrealistic), that 1% is $4M gross before exercise and tax. With realistic dilution (say ownership compresses to 0.55%), the same exit is ~$2.2M gross. Do not sell the no-dilution fantasy.
Trade-off
Cash-heavy vs equity-heavy. Cash-heavy helps with rent and lowers regret if the company fails; it burns runway faster. Equity-heavy aligns upside and preserves cash but excludes people who cannot afford the risk. Many strong early hires need a blend. Extremes (near-zero cash or near-zero equity) are usually mistakes.
Leveling before inequity
Even at ten people, ad-hoc offers create permanent resentment. Two engineers with the same scope, hired six months apart, should not differ by 2× equity because one "negotiated harder."
- Write role levels (even if crude: Junior / Mid / Senior).
- Publish internal cash bands and equity bands by level and function.
- Decide refreshers and promotion bumps in advance.
- Document offers and exceptions; exceptions should be rare and explained.
Common mistakes
- Selling the no-dilution exit math.
- Ad-hoc grants that create 2× inequity for the same work.
- Near-zero cash or near-zero equity.
Check yourself
- Employee #3 gets 1.0% at seed. The company later dilutes that to 0.55% and exits at $400M. Rough gross? About $2.2M, not $4M. Model dilution.
- Why write bands at ten people? Ad-hoc negotiation produces permanent resentment. True-ups later are expensive.
Key takeaways
- Options, four-year vest, one-year cliff. Be generous early.
- Index/YC ranges are orders of magnitude. Verify cash against current surveys.
- Always model dilution. Never pitch the no-dilution number.
- Levels and bands prevent inequity.
Further learning
Index Ventures OptionPlanEntrepreneurs know how important stock options are for hiring and retaining the best talent.Index Ventures
The Holloway Guide to Equity CompensationStock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.Holloway
Next: firing and onboarding.
Related
Hiring and early teams
First hires, compensation bands, equity grants by role, and culture.
Employee equity
Options vs RSUs, strike prices and 409A, vesting and exercise windows, and how to evaluate a startup offer with ownership math.
Option pools
Reserved equity for hiring — size it from a plan, watch the pre-money shuffle, and refresh before the tank is empty.