This document provides guidance on how to split equity in a company and compensate employees with equity. It outlines three major issues to consider: how much equity to give employees, when to give it, and ensuring employees can access their equity. For how much, it recommends either an equity formula approach or segmentation approach. For when to give, it advocates a vesting schedule to motivate employees over time. And to ensure access, it suggests long exercise windows so employees can access equity rights over many years to avoid tax burdens. The document was created by Raad Ahmed in April 2015 to help startup founders properly structure employee equity plans.

1. How To Split Equity In A Company
By : Raad Ahmed
April 2015

2. IT’S MINE NOW!
EVERYTHING ABOUT STARTUP EQUITY

3. BROUGHT TOYOU BY
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4. IT SEEMS LIKEYOU’RE ON THE RIGHT TRACK…

5. ANDYOU ARE STARTING TO HIRE EMPLOYEES…

6. HOW TO COMPENSATE THEM?

7. WITH SALARY AND…

8. EMPLOYEE EQUITY!

9. THERE ARE 3 MAJOR ISSUES
But nothing that you couldn’t handle with a little legal help

10. PROBLEM 1: HOW MUCH TO GIVE?
Both founders & employees deserve a premium on their risk

11. SOLUTION A: EQUITY FORMULA
Math approach to people problem
by Paul Graham

12. HOW DOES IT WORK?
n = (i-1)/i
n - value of a new employee
i - how much a new employee will help the company (eg.
increase

13. SOLUTION B: SEGMENTATION
Business approach to people problem

14. HOW DOES IT WORK?
Put your employees into segments
Segment 1 Segment 2 Segment 3
First 10 employees
Aggregate 10%
compensation
Employees 10-25
Aggregate 5%
compensation
Employees 25-50
Aggregate 5%
compensation
Those exact numbers will vary depending on a situation,
but this concept ensures quite fair equity distribution

15. PROBLEM 2: WHEN TO GIVE?
Equity should be motivating, so let’s not release it all at once

16. SOLUTION: VESTING
A plan for giving out equity compensation

17. HOW DOES IT WORK?
Vesting is a schedule, that plans when
Employee will gain rights to all his shares
after a set amount of time
Motivation behind vesting is for the shares to be
an ongoing motivator for an employee
COMMON VESTING PLAN
4 years of vesting + 1 year cliff
This should be changed to serve
individual situation

18. PROBLEM 3: AVAILABILITY
Sometimes exercising equity rights can be problematic

19. SOLUTION: LONG EXCERCISE WINDOWS

20. HOW DOES IT WORK?
EXERCISE WINDOWS IS A TIME WHEN AN EMPLOYEE CAN
EXERCISE HIS EQUITY RIGHTS
PROBLEM = TAXES
Exercising equity rights means income, which means
taxes have to be payed
Often more than
the employee has
SOLUTION
Allow employees to exercise equity rights for
10 years after those are granted

21. SO WHAT TO DO NOW?

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