In this Mucker Growth Session, Peter Walker from Carta reviews insights and compensation benchmarks for early stage startups gathered from Carta’s extensive dataset of nearly 50,000 startups.
In the evolving landscape of startups, equity management plays a crucial role in shaping business dynamics, especially when it comes to compensation and ownership distribution. This Growth Session looks at key points on founder equity distribution, employee compensation trends, and best practices for managing equity wisely as startups grow.
Understanding Founder Equity Distribution
The founding team significantly impacts ownership structure. According to Carta’s data, most common founding teams have two members, followed by a notable number of solo founders. Contrary to popular belief, having a co-founder isn’t a prerequisite for attracting venture capital.
When it comes to equity splits, approximately 56% of two-founder teams opt for unequal equity splits, with the median split being 55% to 45%. The notion that equity should always split 50-50 is refuted. It’s essential to have open discussions about equity distribution based on contributions, skills, and experience. There are many valid reasons for unequal splits, including proven fundraising capabilities or prior extensive work experience can justify disparities in equity ownership. It’s important to keep in mind the perspective of future investors and to be able to answer questions around equity division for them. Investors may scrutinize significant differences in founder equity ownership, wondering about the rationale behind the distributions.
Early Employee Grants
Early employees are the first, full-time, equity-holding hires (excluding founders). Compensation trends include:
- Median equity grant for the first hire is around 1% of the company, declining rapidly for subsequent hires.
- Hiring beyond the first few employees often results in diminishing equity percentages.
- Founders typically offer larger equity stakes to early hires to mitigate their risk.
Current Trends in Startup Hiring
The hiring landscape post-pandemic shows that startups are hiring less frequently, influenced by economic conditions and layoffs. The average number of employees at the seed stage has decreased, with notable reductions in hiring across various sectors. Net hiring growth has, however been observed in sectors such as energy, hardware, and medical devices.
There’s been a 36% decrease in equity compensation compared to previous years, despite minor salary increases (1-2% year-on-year across functions). Founders are being more generous to their earliest employees, reflecting their importance in laying a solid foundation for the company. Startups do adjust compensation based on employee geography; around 85% implement some form of location-based salary adjustment. San Francisco remains the benchmark for compensation; other regions show varying degrees of salary and equity alignment.
Additional Things to Consider
It’s important to also keep these things in mind when distributing equity and adding to your team:
- Rebalancing Equity: As startups grow, it’s common for discussions about rebalancing equity among founders to arise, often occurring during fundraising rounds when changes in roles are evident.
- Worthwhile Advisor Relationships: Advisor equity typically averages 0.25% for pre-seed startups, with a 90th percentile of about 1%. Many founders find themselves regretting overcompensation for advisors who may not deliver sufficient value over time.
- Titles and Roles: Titles such as “co-founder” should be assigned carefully, as they might carry implications for future hires and organizational structure.
Equity management is a complex but vital element of startup success. Founders must approach discussions around equity distribution and compensation with careful consideration, ensuring transparency and fairness in how they structure ownership. By learning from these consolidated data insights and consistently engaging with key stakeholders, startups can navigate the equity landscape effectively, enabling sustainable growth.
Key Takeaways
- Have transparent discussions about equity splits to ensure alignment among founders.
- Be mindful of employee compensation structures, including geographical adjustments.
- Track industry trends to remain competitive in hiring.
- Consider all aspects of advisor relationships and their value before granting equity.
- Build a structured approach to titles and roles in the organization, anticipating future growth.
By understanding these components of equity management, founders can better position themselves and their startups for long-term success in the competitive market landscape.
Thanks to Peter Walker for this overview of compensation trends and best practices for startups.
