To accelerate the growth of your startup, you must attract great talent.
However, cash is usually scarce when you’re just getting off the ground. Therefore, to attract high-caliber people to your venture, you’ll need to rely on equity.
For example, a VP of marketing equity grant should be 1.3 to 7% if they're founders and 0.5 to 1.2% if they're non-founders.
Let's talk about:
- What a VP of marketing contributes to your startup
- How to calculate stock percentages and grants for executives
- Creating an employee option pool
What is a VP of marketing?
VPs of Marketing are executives who take responsibility for overall marketing for an organization. They oversee marketing strategies to strengthen a company's market position and achieve desired business objectives.
Here are some of their responsibilities:
- Create impactful marketing strategies
- Build a high-performing marketing team
- Drive marketing campaigns that generate leads
- Direct market research for short- and long-term market reports and forecasts
- Collaborate with the sales department to align marketing and sales strategies
- Maintain brand standards across all marketing channels
What does a VP of marketing contribute to your startup?
A VP of marketing helps define the product or service that a startup offers its customers.
They identify the value propositions most enticing to customers and then translate them into product features customers will engage with.
Their efforts are so vital, they could mean the difference between startup success and failure.
What is an equity grant?
An equity grant (also known as equity compensation) is a non-cash payment provided to someone working at a startup.
Equity is usually in the form of stock options and is the currency of the startup universe. After founders divide up the equity pie, they make sure they get a hefty slice. They then use the rest of the equity to entice top-tier talent.
Founders also use equity grants to make up for the salary cut that this same talent will inevitably take when deciding to work for a startup. Equity helps keep employees motivated to stay with an organization with hopes for a big payday when the company goes public.
Organizations that went public or have over 10,000 employees usually offer their employees less equity. That's because most of their compensation is heavily weighted toward salary.
If a critical hire is the third person joining a two-person team, they can be considered a co-founder and should get as much as 10% of the company. But if a VP of Marketing joins once your startup has a product to sell, they should only get between 1% and 2%.
How to calculate stock percentages and grants for executives?
Conventional wisdom dictates that when you decide how much an equity grant should be, you count the number of founders and divide the number of founders into 100. Then, you’ll end up with a fair percentage for each founder.
However, this method doesn’t consider the difference in contributions among team members. When granting equity, share the wealth with those who helped create the value. That way, the reward is a function of performance as opposed to effort.
Contributions in certain areas are of particular value to a venture:
- Skills, experience, track record, or contacts
- Commitment and risk
- Business plan preparation
You’ll have to use these categories and cold, hard research to come up with multipliers that quantify the value an employee adds to your company.
- Figure out the “best value” of your company. This isn’t your 409a valuation, which is something that’s called “fair value.” “Best value” is what the value of your company would be if you sold it right this minute.
- List all your employees. Then, put a multiplier next to their names based on their perceived value. Multiply the individual's base salary by the multiplier to get the equity dollar value. For example, say your VP of Marketing is making $200,000 a year. The multiplier you decided on is 0.5. Multiply this number by $200,000, and you get $100,000.
- Divide the dollar value of equity by your business’s best value. Then, multiply this result by the number of outstanding fully diluted shares to get the grant amount. Say your business is worth $30 million, and 15 million shares are outstanding. So, the VP of Marketing gets an equity grant of ((100,000/30,000,000)*15,000,000). This means the VP gets $50,000.
Issuing equity to employees shouldn’t be a random process. Whether you use this methodology or some other one, it’s wise to use some type of system.
That way, you make the process so much more equitable.
Stock vesting agreements
Sometimes, equity is granted through something called a stock vesting agreement.
A stock vesting agreement is a contract by which a company sells new shares to an employee. These shares then vest over time.
Stock vesting agreements help ensure that there’s a long-term commitment to the success of the startup. Typically, employees usually don’t get any shares until they’ve worked for a year.
Then, they’ll get 25% of their total equity for each year they work. At the end of the vesting period (usually four years,) they’ll get all the equity due them. At that point, they’re free to cash out their shares.
There’s a growing recognition that building a successful startup usually takes longer than four years. Because of this, longer vesting schedules are becoming the norm.
Do you focus on the number of shares or percentage of the company?
It's more important to know what percentage of the company a stock option grant represents than to know how many shares it is. In startups, the meaning is in the percentages.
To calculate percentage ownership, take the number of shares you’re offering and divide by the total number of fully diluted shares outstanding. Once you do this, translate the equity grant into dollar values. This makes it tangible to employees.
A promising startup should be able to dramatically increase the value of their equity over the four years a stock grant vests. A grant with a value of $100,000 could be worth up to $500,000 over the period it vests.
Creating an Employee Option Pool
Founders should eventually consider creating an employee option pool. This is a better way to award equity instead of shaving off ever more shares with each new hire.
To create one, reserve a bunch of shares before you hire your first employees. Your employee option pool will become part of a legal structure known as an equity incentive plan.
Once the pool is established, the company’s board of directors grant stock from the pool to employees as they join the company. Keep in the pool only what you expect to use in the next year or so.
Otherwise, you might be issuing too much equity. A small pool can be good because it’s proof that your company is preserving ownership. This is something investors will look favorably upon.
During Series A funding, set aside 15 to 25% of your outstanding stock for an employee pool. This is a percentage of the value of your company—not a percentage of the available shares.
If a round of funding adds shares, shares are added to the option pool to keep it at the negotiated percentage of the company. Once you grant most or all the pool, you’ll need to expand it.
This usually happens during series B when you’ll add 5 to 10% more outstanding stock. With Series C and later rounds, adding 1 to 2% more each time should be enough.
Annual hire grant or new-hire grant?
Equity grants can be either annual or new hire. Annual grants are more common in established startups and are most often paid to senior organization members. A yearly grant recurs until the schedule changes.
A new hire grant is a one-time grant and is usually higher than an annual grant. Some organizations offer both hire grants and annual grants. What you go with depends on what makes sense for your business.
How much should a VP of Marketing equity grant be?
As was already mentioned, A VP of marketing equity grant should be 1.3 to 7% if they're founders and 0.5 to 1.2% if they're non-founders.
However, it also depends on how much this person is worth to you. It also depends on how much you’re paying them.
If you’re giving them a full salary, then less equity is okay. If the person brings a lot of expertise to your company, the pre-funding stock options should be significantly higher.
Before funding, most startups can't afford to pay too much salary, so they usually compensate by offering higher equity. Also, keep in mind that your employee's equity will be significantly diluted upon funding.
Therefore, you want their equity to be enough to motivate them to stay with your company before and after funding.
Hand out equity grants might be a no-brainer for some startup founders.
After all, it’s a way to fill your startup with high-caliber talent that can dramatically boost your chances of success. However, take some time to understand the value of what you’re giving away by establishing a methodology.
Then if you must spend a little extra to get someone who turns out to be a superstar, you’ll know why.