A Guide to Equity Compensation for Startups

Building a talented team presents one of the biggest challenges for startups that lack the bottomless investor resources of established corporations. Early-stage companies frequently leverage equity compensation as a strategic solution to this resource constraint. By offering ownership stakes, startups convert job candidates into committed partners who have genuine skin in the game.

According to Silicon Valley Bank, “Equity is the currency of the tech and startup worlds,” and compensating with equity represents more than just an alternative payment method. It creates a powerful alignment between individual success and company growth. When employees hold ownership stakes, they develop a vested interest in driving innovation and performance that extends far beyond traditional salary motivations.

Building an effective equity compensation plan requires strategic thinking and careful execution. The right approach can help startups compete with larger organizations for top talent while preserving precious cash flow. This guide explores the key steps to establish an effective equity program that attracts top talent and scales in tandem with business growth.

What is equity compensation?

Equity compensation is a form of non-cash payment that grants employees an ownership stake in their company’s future success. Rather than receiving traditional salary increases or bonuses, employees earn shares or the right to purchase shares at predetermined prices. This approach transforms workers into stakeholders who benefit directly from the organization’s growth and value creation.

The most common equity compensation instruments include stock options, restricted stock units, and restricted stock awards. Stock options come in two primary forms: Incentive Stock Options (ISOs) and Non-qualified Stock Options (NSOs). Each carries different tax implications and eligibility requirements. Restricted stock units (RSUs) and restricted stock awards (RSAs) grant actual or promised shares that are attached to specific conditions.

Most equity compensation arrangements include vesting schedules that determine when employees can access their ownership benefits. These schedules typically span multiple years and require continued employment to unlock the full value. The ultimate realization of equity value usually occurs during significant company events such as acquisitions, initial public offerings, or secondary sales.

Why equity compensation matters for startups

Early-stage companies face unique challenges when competing for exceptional talent against established organizations with deeper financial resources. Equity compensation provides startups with a powerful tool to level the playing field and attract skilled professionals who believe in the company’s potential.

Key benefits for startup organizations include:

• Cost-effective talent acquisition. Enables hiring top performers without immediately inflating operational burn rates or straining cash flow
• Aligned incentives. Creates shared interests between founders, employees, and investors around long-term company success
• Enhanced retention. Builds loyalty through vesting schedules that encourage employees to remain with the organization for extended periods
• Compelling recruitment narrative. Offers candidates the opportunity to participate in potentially significant financial upside as early stakeholders
• Performance motivation. Encourages employees to think and act like owners rather than traditional workers
• Tax advantages. Provides potential tax benefits for both employers and employees compared to traditional cash compensation

Steps to building a startup equity compensation plan

Creating an effective equity compensation plan requires careful planning and strategic decision-making across multiple areas. Successful implementation involves striking a balance between equity incentives and founder control, while ensuring compliance across various jurisdictions.

The following steps outline a structured approach to developing a comprehensive equity program that attracts top talent and scales with business growth.

1. Create or finalize your cap table

The capitalization table, or cap table, is the foundation for all equity decisions and must clearly define how much ownership will be reserved for employee compensation. Most early-stage startups allocate between 10% and 20% of total equity to an employee option pool, with seed to Series A companies typically setting aside 5% to 15% initially. Working with legal and finance experts ensures the proper management of dilution across future funding rounds, helping to maintain founder control while providing meaningful employee incentives.

2. Choose your equity instruments

Different equity instruments serve specific purposes and cater to different employee categories within the compensation strategy. ISOs offer favorable tax treatment but remain limited to U.S. employees only. NSOs provide greater flexibility for contractors and international workers who are unable to access ISO benefits. RSUs work particularly well for later-stage companies or international teams operating through Employer of Record (EOR) arrangements.

3. Set vesting schedules

Industry-standard vesting follows a four-year schedule with a one-year cliff, releasing 25% of the shares after the first year. Monthly vesting occurs thereafter until full vesting is achieved at 48 months, although some companies now extend schedules to five years or longer. Consider alternative approaches, such as milestone-based or performance vesting, for key strategic hires who drive specific business outcomes.

4. Define grant sizes by role and level

Equity grant sizes should reflect market benchmarks while accounting for role seniority, risk level, and strategic value to the organization. Research platforms like AngelList, Carta, and Option Impact offer insights into competitive grant sizing across various functions and experience levels. Technical roles often receive higher equity percentages compared to commercial positions, with grants typically ranging from 6.5% to 13% of base salary depending on seniority.

5. Plan for refresh grants

Equity refresh programs help retain valuable employees beyond their initial vesting periods, thereby maintaining long-term motivation. Refresh grants typically represent approximately 30% of what a new hire would receive for the same role and can be structured as annual grants or boxcar arrangements. Planning for refresh allocations during performance reviews and promotions ensures continued employee engagement while managing overall equity pool dilution.

6. Address global equity considerations

International expansion requires meticulous attention to local legal and tax compliance requirements, which vary significantly across jurisdictions. Equity plans often need adaptation or alternative structures to meet regulatory requirements in different countries. Platforms like Velocity Global enable compliant equity offerings to international employees through global EOR services that navigate complex local regulations.

How to communicate equity value to employees

Equity compensation only drives motivation when employees truly understand its potential value and long-term benefits. Many organizations make the mistake of assuming that simply granting equity automatically creates engagement and loyalty. Without clear communication and ongoing education, even generous equity packages may fail to achieve their intended retention and performance goals.

Essential information to communicate

Effective equity communication requires transparency around grant specifics and their potential value. Clearly explain the exact number of shares granted, the current percentage of fully diluted shares this represents, and concrete value examples based on recent valuations. Always include disclaimers about valuation risks and the speculative nature of future returns.

Vesting schedules and exercise windows require a clear explanation through visual timelines that show when shares become exercisable. Most employees benefit from seeing their vesting progression mapped out over the full term, including cliff periods and any deadlines for exercising options after employment termination. Exercise windows carry essential tax implications that vary between equity instruments.

Exit scenarios and ongoing education

Employees need realistic expectations about when and how they might realize equity value through acquisitions, initial public offerings (IPOs), secondary sales, or other liquidity events. Each scenario affects equity value differently and may include specific provisions regarding acceleration or continued vesting post-transaction. Some companies also facilitate secondary market opportunities, providing earlier liquidity options.

“There is typically a 90-day window after you stop working at the company for the repurchase right to be exercised,” said Greg Miaskiewicz, a serial entrepreneur, product designer, and security expert. “Investors do not want to see dead equity on the cap table—meaning they do not want shareholders with large ownership stakes in the company on the cap table if these shareholders are not actively contributing to the further development of the company’s product and the growth of the business.”

Equity education should begin during talent recruitment conversations and continue through structured onboarding programs. Ongoing communication through performance reviews, company meetings, and funding round updates keeps employees informed about factors affecting their equity value.

Common mistakes to avoid

Even well-intentioned equity compensation programs can backfire when founders make critical errors in planning, communication, or execution. Learning from these common pitfalls helps organizations build more effective equity strategies that motivate employees without creating future complications.

Key mistakes to avoid include:

• Offering vague percentage promises without explaining dilution. Telling employees “you’ll get 2% of the company” without explaining how future funding rounds will reduce that percentage creates unrealistic expectations and eventual disappointment.
• Failing to plan for refresh grants and future hiring needs. Not reserving adequate equity pool capacity for ongoing grants and new hires can force companies to dilute existing shareholders or offer less competitive packages to later employees.
• Over-granting equity early in the company’s lifecycle. Giving away too much equity to early employees and advisors without considering long-term hiring needs often leads to insufficient equity for key future roles and funding constraints.
• Ignoring international compliance requirements. Offering equity to global employees without understanding local securities laws, tax implications, and documentation requirements can result in legal penalties and invalid grants.
• Implementing inadequate or missing vesting schedules. Allowing employees to earn equity too quickly or without proper cliff periods creates retention risks and potential disputes when early team members leave with significant ownership stakes.
• Making administrative errors in cap table management. Poor documentation, incorrect grant calculations, and failure to track vesting properly can create expensive legal problems and employee relations issues that are costly to resolve.

How Velocity Global helps with global equity management

At Velocity Global, we enable organizations to distribute compliant equity compensation across 185+ countries through our Global Equity Program and EOR solutions. Our platform integrates with existing equity management systems to streamline international grant administration, while providing local legal guidance tailored to taxation and documentation specific to each jurisdiction. We offer a comprehensive solution that simplifies equity compensation for globally distributed teams—ensuring accurate payroll processing, supplemental reporting, and ongoing compliance monitoring. Contact us to learn more.

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

© 2025 Velocity Global, LLC. All rights reserved.