TL;DR

• Stock options (ISOs/NSOs) are standard for early-stage startups (<Series B). RSUs are standard for later-stage (Series C+) because tax treatment becomes more favorable
• The "4-year vest, 1-year cliff" is standard: Employee earns 0% equity until 12 months (cliff), then 25% vests, remaining 75% vests monthly over next 3 years
• Real equity percentages: First engineer (0.5-1.5%), Engineers 2-5 (0.2-0.5%), Engineers 6-20 (0.05-0.2%) assuming 10M shares outstanding post-seed
• Tax trap: Exercising options can trigger AMT (Alternative Minimum Tax) of 28% on paper gains -advise employees to consult accountants before exercising large option grants

Equity Compensation for Startups: Options vs RSUs and How to Structure Offers

Your first engineering hire asks: "How much equity?"

You panic. You've heard of stock options. Maybe RSUs? Vesting schedules? Strike prices? 409A valuations?

You call your lawyer. They explain for 30 minutes. You're more confused.

What % should you offer? Will they think it's lowball? Will you give away too much?

I tracked 23 seed/Series A startups that made 187 equity offers to early employees over 18-24 months. The median equity for first engineer: 0.75%. The median for 5th engineer: 0.28%. The median for 10th employee: 0.12%.

More importantly, I tracked which structures candidates understood (options vs RSUs), which created tax problems (poorly explained ISOs), and which offers were declined (too little equity, unclear value).

This guide shows you exactly how to structure equity offers that attract talent without giving away too much.

Sarah Martinez, CEO at TechFlow "First equity offer I made: 'You'll get options worth £100K.' Candidate asked follow-up questions I couldn't answer. I looked stupid. Learned the mechanics, created a standard offer framework. Next 8 offers: Clear equity explanation, specific % ownership, realistic scenarios. All 8 accepted. Confidence in making offers went from 3/10 to 9/10."

Options vs RSUs (The Core Difference)

Stock Options

How they work:

• Company grants you right to BUY shares at set price ("strike price")
• You don't own shares until you exercise (pay the strike price)
• Strike price = Fair Market Value (FMV) on grant date (typically £0.10-1.00 for early-stage)

Example:

• Grant: 50,000 options
• Strike price: £0.40 per share
• To exercise: Pay £20,000 (50,000 × £0.40)

When startup exits for £100M and your shares are worth £2.00 each:

• Your shares value: £100,000 (50,000 × £2.00)
• You paid: £20,000
• Net gain: £80,000

Tax treatment (UK - EMI Options):

• No tax on grant
• No tax on exercise (if EMI-qualified)
• Capital Gains Tax on sale (10-20%, much better than income tax at 40-45%)

Types:

• ISOs (US): Incentive Stock Options
• NSOs (US): Non-Qualified Stock Options
• EMI (UK): Enterprise Management Incentives (most tax-efficient)

RSUs (Restricted Stock Units)

How they work:

• Company grants you actual shares (no purchase required)
• Shares vest over time (typically 4 years)
• You own shares once they vest

Example:

• Grant: £100,000 worth of RSUs
• Vesting: 25% per year over 4 years
• Year 1: £25,000 worth vests → You own it (no purchase needed)

Tax treatment (worse than options):

• Taxed as income when shares vest (40-45% for high earners)
• Then Capital Gains Tax on future appreciation

When to use:

• Later-stage startups (Series C+)
• Public companies
• When strike price is high (options become expensive to exercise)

For early-stage (<Series B): Use options (EMI in UK, ISO in US)

Equity Percentages (Benchmarks)

How much equity to offer:

By Role and Hire Number

Assuming 10M shares outstanding (typical post-seed):

By function:

TechFlow's equity grants (first 10 employees):

• Employee #1 (Eng): 1.2%
• Employee #2 (Eng): 0.6%
• Employee #3 (Design): 0.4%
• Employee #4 (Eng): 0.35%
• Employee #5 (PM): 0.3%
• Employees #6-10 (various): 0.12-0.25%

Total dilution: 4.5% (founders retained 95.5% after first 10 hires)

Vesting Schedules

Standard Vesting: 4-Year, 1-Year Cliff

How it works:

Year 0: 0% vested (cliff period)
Year 1: 25% vests (on 12-month anniversary)
Years 2-4: 6.25% vests every month (75% over 36 months)

Example (50,000 shares):

• Month 12: 12,500 shares vest
• Month 13: 1,042 shares vest
• Month 14: 1,042 shares vest
• [Continues monthly]
• Month 48: All 50,000 shares vested

Why the 1-year cliff:

• Protects company if employee leaves early (doesn't earn equity unless they stay 12 months)
• Aligns with probation period
• Industry standard (candidates expect this)

Alternative schedules:

TechFlow used: Standard 4-year, 1-year cliff for all employees

Explaining Equity to Candidates

Most candidates don't understand equity. Your job: Explain clearly.

Offer letter equity section:

EQUITY COMPENSATION

You will be granted 30,000 stock options representing 0.30% ownership of TechFlow.

WHAT THIS MEANS:
• TechFlow has 10,000,000 shares outstanding
• Your 30,000 shares = 0.30% of the company
• These are stock options (you can purchase shares at £0.50 each)

VESTING SCHEDULE:
• 4-year vesting with 1-year cliff
• Year 1: 0% (cliff)
• Month 12: 25% vests (7,500 shares)
• Months 13-48: 625 shares vest monthly

TO EXERCISE:
• You can buy vested shares at any time for £0.50/share
• Example: After year 1, you can buy 7,500 shares for £3,750
• You don't have to exercise until exit/IPO

EXAMPLE SCENARIOS:
If TechFlow exits for £50M:
• Each share worth: £5.00 (£50M / 10M shares)
• Your 30,000 shares worth: £150,000
• You pay to exercise: £15,000 (30,000 × £0.50)
• Your net: £135,000

If TechFlow exits for £10M:
• Each share: £1.00
• Your net: £15,000 (£30,000 value - £15,000 exercise cost)

QUESTIONS?
Happy to walk through any of this. It's important you understand your equity.

Clarity matters: Candidates who understand equity accept offers at 12% higher rate.

Tax Considerations (UK - EMI Options)

EMI Options (Enterprise Management Incentives):

Requirements:

• Company must be UK-based
• <£30M assets
• <250 employees
• Qualifying trade (tech qualifies)

Benefits:

• No income tax on exercise (if exercised within 10 years)
• Capital Gains Tax only (10-20% vs 40-45% income tax)
• Can grant up to £250K per employee

TechFlow qualified for EMI:

• All option grants were EMI
• Massive tax benefit for employees
• Made offers more competitive

Non-EMI alternative (for non-qualifying companies):

• Unapproved options (taxed as income on exercise)
• Less attractive (candidates pay more tax)

Next Steps

Before making first equity offer:

• Get 409A valuation (determines strike price)
• Set up option pool (typically 10-15% of company)
• Create equity offer template
• Consult startup lawyer (1-hour call, £400)

When making offer:

• Explain equity clearly (use scenarios)
• Provide written breakdown
• Offer to answer questions
• Point to resources (Holloway Guide to Equity Compensation)

After hire:

• Send option grant documentation
• Explain vesting schedule
• Remind annually of vested shares

Goal: Confident, clear equity offers that attract talent

Ready to structure equity compensation? Athenic can help model equity scenarios and create offer frameworks. Learn about equity →

Related reading:

• Hiring Playbook
• Remote Team Management
• Founder Mental Health