5.04Equity, ESOPs and compensation

Allocating equity by level: founding team, minus-one hires, executives, individual contributors

Stage: SeedCore

1. Core idea and who it's for#

Equity in a startup comes in tiers , and the gap between them is large. The tiers are:

  • founders , who share the founding equity;
  • minus-one hires , the people who join before funding or product-market fit (6.02); executives , the C-level and VP hires;
  • individual contributors , the engineers, scientists and operators who make up most of the team.

The mistake founders make most often isn't giving too much or too little overall. It's putting someone in the wrong tier . Examples:

  • treating a senior first hire as a co-founder;
  • giving the fifth hire what the first got;
  • promising a VP "2%" before checking what the pool can support.

The main principle is that founders split the company, and everyone else is granted from the pool, sized by how early they join and how senior they are. Index Ventures draws the same line: co-founders share 100% between them at the start, and everyone who joins later, however senior, receives options from the pool. A non-founding C-level hire usually lands around 0.8–1.5% , an order of magnitude below founder equity (Index Ventures via Startingup).

Two forces set grant size:

  1. Timing, meaning risk. Equity falls steeply with hire number, because each hire joins a less risky company.
  2. Seniority, meaning leverage. At any given stage, a VP gets more than an IC, and a senior IC gets more than a junior one.

A good allocation framework turns these two forces into a grid : stage on one axis, level on the other, with a range in each cell. Every offer starts from the grid and moves within the range for a stated reason.

Who this is for: founders making their first 5–20 hires, or preparing an offer for a first executive, who want the offers to be defensible to both the candidate and investors. For splitting founder equity, see 3.05. For sizing the pool, see 5.01.

2. Benchmarks: what the data says#

By hire number (US, Carta). All figures are initial grants as a share of fully diluted equity, usually vesting over 4 years with a 1-year cliff.

Hire Median 25th–75th percentile
#1 1.50% 0.50–4.00%
#2 0.85% 0.30–2.00%
#3 0.50% 0.20–1.20%
#4 0.44% 0.18–1.00%
#5 0.33% —

Source: SaaStr's summary of Carta data (SaaStr).

The curve is steep: the first hire gets nearly five times what the fifth gets, and only the first hire typically breaks 1% at the median. Other points from Carta:

  • Rising grants. In its H1 2026 compensation report, the median first hire over the previous two years received 1.75% , and that figure is still rising (Carta).
  • First engineers. The median founding-engineer grant is 1.54%, with a 25th–75th percentile range of 0.61–3.5% (Carta).
  • Biotech pays more early. The median first-hire grant is 2.01% in biotech against 1.45% in SaaS (Carta). Deeptech first hires are usually scarcer and riskier, so expect the upper half of the range.
  • Big grants are rare. Only 7% of first-five hires received 5% or more (Carta).
  • By level (Index Ventures). Index's executive guidance:
  • C-level: 0.8–1.5%, with at most three true C-level executives as the company scales; VP level: 0.4–0.7%, with room for five to eight VPs (Index Ventures via SlideShare).
  • For the rest of the team, SeedLegals summarises the Index and Balderton guidance as:
  • directors 0.5–1%;
  • managers and other key functions 0.2–0.7%;
  • everyone else 0–0.2%;
  • up to about 1% each for the first 10 employees (SeedLegals).

Index also sizes grants as a percentage of salary . At seed, options worth 40–85% of salary are typical, depending on seniority and whether the role is technical (Optio).

India and APAC. Pools start smaller. Carta's APAC and Middle East data shows ESOP pools at 7% at pre-seed and 11% at seed , staying at 11–13% at later stages. The median pre-seed company has four employees, and the median seed company eight (Carta APAC & ME). With a smaller pool, individual grants are usually smaller than US medians, and salaries tend to be closer to market. Treat the US grid as an upper bound and calibrate against offers you can actually see in your Indian peer group. That's a practitioner rule of thumb, not a published benchmark.

The lesson from the data: benchmarks give you the shape of the curve and a range for each cell. Where an offer sits within the range depends on the candidate's scarcity, the salary trade-off and how much risk they're taking on.

3. Method: build a grid, then size every offer from it#

Step 1. Define the levels. Five are enough at pre-seed and seed:

Level Who Typical grant at seed (% fully
diluted, 4-year)
L0 — founder Joined before or at formation,
and took founder risk		 From the founder split (3.05),
not the pool
L1 — minus-one
hire		 Hires #1–3, before funding or
product-market fit, often below
market salary		 0.75–2.5% (median about 1.5%
for hire #1, falling quickly)
L2 — executive C-level, VP or head of function C-level 0.8–1.5%; VP 0.4–0.7%
L3 — senior IC or
manager		 Senior scientist, staff engineer,
lead		 0.2–0.7%
L4 — IC Engineer, scientist, operator 0.05–0.25%

These ranges come from the benchmarks in section 2. Shift them down as the company matures. Grants for post-Series A hires at the same level are typically 30–60% smaller as a percentage, because the shares are worth more.

Step 2. Pick the point in the range. Start at the midpoint and adjust for:

  • scarcity: a rare skill or a hard-to-hire location moves the grant up;
  • salary sacrifice: someone taking 30% or more below market moves up;
  • scope: owning a whole function moves up;
  • timing: joining after a major de-risking milestone moves down.

Write one sentence explaining each adjustment.

Step 3. Check the grant against salary. Translate the percentage into money at the current preferred price, or the last post-money valuation, and compare it with salary. At seed, options worth roughly 40–85% of annual salary over four years are typical. If yours is far outside that, check the level.

Step 4. Check the pool. Add up every planned hire to the next round (5.01). If the planned grants exceed about 80% of the available pool, either the plan is too generous or the pool is too small. Fix it before you make offers, because top-ups dilute everyone (5.03).

Step 5. Write the grid down and use it. Keep a one-page equity policy with the levels, ranges, vesting terms (4 years with a 1-year cliff), refresh rules (5.05) and who approves grants. Consistency protects you when early employees compare notes, which they will.

Step 6. Don't give titles as a substitute for equity, or the other way round. A "cofounder" title for hire #1 creates expectations of founder-level equity and board rights. Agree on whether someone is a founder (L0) or the first hire (L1) before you discuss numbers.

Worked example (illustrative)#

A quantum-sensing startup has just closed a seed round at a $20M post-money valuation with a 12% pool. It plans five hires before the Series A.

Hire Level Grant Rationale Value at seed
price		 Salary
Founding physicist (hire #1,
joined pre-seed)		 L1 1.8% Rare skill; took a 35% pay
cut		 $360,000 $150,000
Head of engineering L2,
VP		 0.7% Owns hardware and
firmware; senior hire		 $140,000 $200,000
Senior FPGA engineer L3 0.35% Hard to find; at market
salary		 $70,000 $170,000
Two engineers L4 0.15%
each		 Standard $30,000 each $130,000
each
Total 3.15%

The 3.15% total is about a quarter of the 12% pool, which leaves room for the Series A executive hires and refreshes. The values of the L2 and L3 grants are 70% and 41% of salary, inside the 40–85% band. The founding physicist's grant is well above that band,

which is deliberate because she joined before the money. The company writes its grid down and shares the level ranges, not individual grants, with the team.

4. India / US / UK differences#

India#

  • Pools and grants run smaller than in the US (section 2). Candidates often discount ESOPs heavily because they are taxed at exercise and liquidity is uncertain, so explain the tax deferral for eligible startups (5.01) and any buyback history.
  • Who can receive ESOPs. Under Rule 12 of the Companies (Share Capital and Debentures) Rules, promoters and directors holding more than 10% generally can't get ESOPs. DPIIT-recognised startups can grant them to such people for up to 10 years from incorporation. Founders who join late or take a top-up can benefit.
  • One-year minimum vesting is mandatory, which suits the standard 1-year cliff.
  • Senior hires and executives often negotiate for cash-heavy packages with a smaller ESOP. Be ready to offer a higher salary in place of percentage points.

US#

  • Grids are well established. Carta, Pave and Index's OptionPlan publish level-by-stage benchmarks, and candidates will look them up.
  • ISOs and NSOs. ISOs give employees better tax treatment, but only $100,000 of ISOs can first become exercisable in any one year, and the excess is treated as NSOs. Large executive grants often end up partly as NSOs (5.02).
  • A 409A valuation sets the strike price. Grants made before an up-to-date 409A risk tax penalties for employees.
  • Early exercise with an 83(b) election is common for L1 hires when the strike price is very low.

UK#

  • EMI options are the default for qualifying employees. From 6 April 2026, the company limit is £6m of options and the gross-assets limit is £120m. The individual limit is still £250,000 of unexercised EMI options at grant value. Very large executive grants may go over it, and the excess becomes unapproved options.
  • The working-time test: EMI holders must work at least 25 hours a week, or 75% of their working time, for the company. Part-time scientific advisers and academics usually fail this and need unapproved options instead (2.12).
  • European norms are a little lower than the US, but Index's work has pushed UK grant sizes towards US levels. Expect candidates to bring US numbers into the negotiation.

Scripts#

Making an offer to a first hire:

"We're offering 1.8% of the company on a fully diluted basis, vesting over four years with a one-year cliff. That's above the median for a first hire, because you're joining before our seed round and taking a pay cut. At the seed price it's worth about $360,000 today. If we reach our plan, it could be worth many times that. If we don't, it could be worth nothing."

When someone asks for co-founder equity:

"Co-founders took the risk before there was anything here, and their shares come from the founding split. You're our first and most important hire, so you're getting the top of the range for that tier, and a refresh at the Series A if the role grows. I'd rather be clear about the tiers than blur them now and have a difficult conversation later."

Answering an executive who quotes "2%":

"For a VP joining after seed, the market range is roughly 0.4–0.7%. For a C-level role it's 0.8–1.5%. We're at the top of the VP range, with a performance-based top-up at the Series A. Here's the cap table maths showing what that's worth at our next-round target."

Common mistakes#

  1. A flat curve: giving hire #5 what hire #1 got.
  2. A "co-founder" title for a hire, which creates founder-level expectations that can't be met.
  3. Promising a percentage before checking the pool. The next round then forces a topup that dilutes everyone.
  4. Ignoring the salary trade-off. Equity should rise when cash falls, and the reverse.
  5. No written grid, so early employees compare grants and find inconsistencies.
  6. Quoting percentages without the money. Employees can't value 0.2% unless you show it in currency at a stated price.
  7. Copying US numbers in India, or Indian numbers to a US hire. Calibrate to the market each hire is in.
  • 3.05 Splitting founder equity
  • 3.06 Founder vesting
  • 5.01 ESOP pool sizing
  • 5.02 ESOP plan design: India vs US
  • 5.03 Pool top-ups
  • 5.05 ESOPs for second-line employees
  • 6.02 Hiring the minus-one team

Sources#

The worked example is illustrative. Benchmarks describe the market, so use them to set ranges, not to replace judgement. Last checked November 2026.

← 5.01 Sizing the ESOP pool at each stage5.05 ESOPs for second-line employees: grant bands and refreshes →