Rocking Team Options: How to Share the Pie

Offering options to your team can be more challenging than solving a Rubik's cube. To make it easier, we've created a straightforward guide on how to allocate options. We’ve outlined the key differences between some of the approaches, and explained how to create job role and level matrices for effective options allocation.

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If that sounds tedious and you'd prefer to skip the details, just head to our compensation calculator for a quicker solution.

The Allocation Principles

These are the two most common ways on how to allocate options to your team:

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• As a percentage of annual gross salary;
• As a pre-determined number based on the employee’s job title and level.

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Calculating options for someone based on a percentage of annual gross salary is the easiest solution for companies whose shares are already somewhat valuable since the share value will be one of the components in the calculations. If their share value is too low, then the calculations won’t make too much sense.

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Giving out options based on pre-agreed numbers based on employee’s job title and level is also a great way of giving out options, both in early and growth startups, but more thought has to be put into building the framework to make the numbers make sense across different teams and levels.

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Both possibilities have their pros and cons and will be discussed more below.

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For full disclosure, there is also a third very common way how to give options, most used in very early startups:

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• As a percentage of company ownership - e.g. an early senior employee might get 1% of the company.

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However, this article will focus on the first two.

Find your Perfect Fit

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

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

1. Calculating Equity Grants as a % of Annual Gross Salary

How 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 them a grant worth of €70,000 vesting e.g. over 4 years.
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• Pros:
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  • 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:
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  • 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.
  • More ownership for folks in richer countries.
  • As the equity amount (number of shares or employee options) that is given out is dependent on the salary, then employees in richer countries get a bigger % of the company ownership.
  • 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.
  • 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.

How to Build the Structure?

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

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Job Roles:

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

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Job Levels:

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• 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.

These percentages are merely an example. Feel free to adjust them based on your company's needs.

2. Setting Equity 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. E.g. you could say that all senior designers get 2,000 options, no matter what their salary and no matter which country they work in.

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• Pros:
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  • 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 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:
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  • Unfair in terms of spending power.
  • Getting €100k worth of shares in the UK vs. Latvia means the employees in the UK can do much less with their income received from shares as things are more expensive in the UK.

How to build the Structure?

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

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Job Roles:

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

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Job Levels:

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• Junior
• Mid-level
• Senior

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Then simply add option amounts to the table:

I know this is easier said than done. This process will require a lot of negotiations with the heads of teams to get the numbers to make sense in one big table. If the hiring managers 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 a need to offer additional grants where the given grants are too low. Also, think of gender and other equality-related data when reviewing existing option amounts.

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.

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 terms of spending power but gets messy with relocations. 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!