Rocking Stock Option Grants in 2024: How to Share the Pie

Giving out stock option grants to your team can be trickier than a Rubik's cube. To help you, we have created this easy-to-follow guide on two of the most widely used approaches to options allocation.

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We have summarised the best practices on:

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• Differences between the two approaches: they both have their pros and cons;
• Creating job role and level matrices for options allocation with these approaches.

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If the above sounds really boring and you don’t feel like reading, then just head to our compensation calculator for an easier way out.

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Nail Your Allocation Principle

There are actually three common approaches to allocation strategy:

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1. stock option grant calculated as a % of annual gross salary;
2. stock option grant calculated based on the employee’s job title and level;
3. stock option grant given as a % of company ownership.

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This article will focus on the first two, as the last one is completely different and deserves an article of its own.

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Find your Perfect Fit

This article won’t tell you exactly how much to give to each of your employees, as that depends on many factors, e.g., market expectations, the company’s generosity in giving out ownership, employee’s desire to negotiate between salary and equity, etc.

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However, if you have decided to have more structure in giving out equity, it will help you weigh the pros and cons of different approaches. Structure helps with fairness, maintaining your option pool, and reducing headaches, as you don’t need to come up with an approach for every hire separately.

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1. Calculating Stock Option Grants as a % of Annual Salary

What does it look like? If a mid-level engineer has an annual salary of €100,000 and you decide all mid-level engineers in your company should have a 70% option grant, then you would give a grant worth €70,000 over a certain amount of years.

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• Pros:
  • Keeps spending power fair across regions.
    No matter where your employee works, they get equity dependent on their salary numbers. When equity is tied to the salary, assuming the salaries are based on local market data, it automatically takes local spending power into consideration. This is good because it is much easier to find market data on salaries than on equity
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• Cons:
  • Headache for international movers.
    If you have a global company where employees move a lot between offices but their equity has been tied to salary numbers, then the option (or other equity) packages need to be adjusted post relocation. It is easy to do if the employee is moving to a country with a higher salary - then you just give them more equity. However, it is a bit more difficult to reduce the number of options that has already been promised. If you wish to do this, it is recommended to get legal advice beforehand.
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  • More ownership for folks in richer countries.
    As the equity amount (number of shares or employee options) that are given out are dependent on the salary, then employees in more developed countries get a bigger % of the company ownership.
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    E.g. if the share price of the company is €10, then the engineer with a €100,000 annual salary, who was promised options worth of €70,000, will get 7,000 options. In another country, an engineer of the same level could have a salary of €50,000, but 70% worth of options out of €50,000 is a lot lower. The engineer with a lower salary would only get 3,500 options.
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    Why is this a problem? Well, if you strive for fairness and would like the people doing the exact same job, to get the same slice of the company, then in this case, the person with the higher salary would get 2x more ownership than the other person.

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How to build the Structure?

To keep things fair, group your team by job role and level. Here's one way how you could do it:

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Job Roles:

• Engineering, Product, Specialised Skills
• Finance, HR, Marketing, Sales
• Customer Service, Operations

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Job Levels:

• Junior
• Mid-level
• Senior

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Higher job levels and more technical roles usually score bigger grants.

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The table shows grant size estimates expressed in % of annual salaries.

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These %-s are merely an example. Feel free to adjust it based on the needs of your company.

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2. Setting Stock Option Grants per Job Title and Level

How does it look like? To use this approach, you will need to create a fixed table with all job titles and levels in your company and designate a specific amount of options to them. In the table you could have that all senior designers get 2,000 options, no matter what their salary and no matter which country they live in.

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• Pros:
  • Everyone on the same job level gets the same slice of the company’s success.
    The company ownership % for a designer in Spain is the same as the company of ownership % in Thailand, because they would both get 2,000 units worth of equity. There are no variations dependant on salary.
  • Smooth sailing for relocations.
    There will be no need to adjust equity packages for movers, as the levels are all the same globally.
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• Cons:
  • Unfair in terms of spending power.
    Getting €100k worth of shares in the UK vs. Latvia.

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How to build the Structure?

Just like the percentage approach, group your employees by job role and level.

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Job Roles:

• Product, Engineering
• Finance, HR, Marketing, Legal
• Customer Service, Operations

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Job Levels:

• Junior
• Mid-level
• Senior

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Then simply add option amounts to the table:

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I know this is easier said than done. This process will most probably require a lot of negotiations with the heads of teams, to get the numbers to make sense in one big table. If people doing the hiring have so far been used to a lot of liberty and there is not a lot of cohesion as to how much equity employees have received, there might even be need to offer additional grants where the grants are too low. Also think in terms of gender equality when reviewing existing option amounts.

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Stay Flexible

With both approaches you can also let employees trade equity for salary within a specified range (like 10%, 15%, 20%). This is super handy for landing execs, product pros, and engineers. C-level hires are often not included in such pre-defined structures as their positions are unique in the company and their salary/equity negotiations require a different approach..

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Time to rock that option allocation!

As you see, figuring out stock options can be tricky, but I hope this article helped. Remember, the salary-based approach keeps things fair in the wallet but gets messy with relocations and might favour big earners. The role based approach keeps it simple and equal globally but might overlook local cost differences. See what works best for you and go make your peeps happy!