There’s a very simple way to look at equity round by round.
Imagine there’s you and your clone. Your clone has the exact same set of skills you do.
The only difference between you and your clone is you joined your company one year earlier. You should be rewarded for the risk you took by always having more equity than your clone.
How would this work in reality? Let’s say you and your cofounders own 60% of the company and your investors own 20%. You have a stock pool of 20% for any employees you hire.
The stock pool isn’t meant to last forever, but just for a finite time period usually around one to two years, or at least until the next round of funding.
So you know how many employees you’re going to hire in that time period. Divide the options up amongst your future employees.
Then in the next round of funding allocate some of the new option pool for your existing employees.
I’m a big believer in refreshing your existing employees. Refreshing is the best way you can reward your early employees for the risk they took.
Ideally, this is how refreshing should work:
Let’s say you’ve just raised your Series B funding. Look at all of your existing employees as if you have to rehire them.
What would you give them in options as new hires at this stage? Add that to the back end of the options they already have.
So, an employee that was given two years ago 0.5% has vested half the options given. The dilution in the Series B was 20%, so 0.5% is now 0.4%.
A new employee with the same skill set (your clone) would get 0.3%. Add two years of options worth 0.15% to the back end of the original options.
The employee’s options now look like this (after dilution):
Yr 0 Yr 1 Year 2 Year 3 Year 4 Year 5 Total
0.1% 0.1% 0.1% 0.1% 0.075% 0.075% 0.55%
Year 0 and Year 1 have vested, so the employee has 0.35% unvested options.
Maybe that doesn’t fully recognize your employees for the risk they took, but it’s the best you can do.
Most importantly, refreshing your employees assures you will never have the case where an employee’s clone will have more equity than they will have. That’s just wrong and completely unfair.