How startups pay to employees by using dilution on cap-table
Shares for employees
When a startup pays employees using equity, typically through stock options, it involves diluting the existing shareholders’ equity. The dilution pool, or option pool, is set aside specifically for this purpose. The formula to calculate the amount of equity each employee receives depends on the size of the dilution pool, the value of the company, and the number of employees.
Here’s a general formula to calculate the equity grant for an employee:
Equity Grant per Employee=(Dilution Pool Percentage / Number of Employees)×Company Valuation
Let’s apply this to your example:
- Seed Round Valuation: $2,000,000
- Dilution Pool: 10%
- Time until Next Round: 12 months
- Number of Employees: N (we’ll need this to calculate the equity per employee)
First, calculate the total equity set aside for employees:
Total Equity for Employees=Dilution Pool Percentage × Company Valuation
Total Equity for Employees=10% × $2,000,000 = $200,000
Now, divide this amount by the number of employees (N) to find the equity grant per employee:
Equity Grant per Employee = $200,000 / N
For example, if the startup has 10 employees:
Equity Grant per Employee = $200,000 / 10 = $20,000
Each employee would be granted equity worth $20,000. It’s important to note that this equity is usually subject to a vesting schedule, which could be over several years with a cliff period. The vesting schedule defines how and when the employees can actually own this equity. The 12 months until the next round doesn’t directly affect the equity grant calculation but is important for planning future dilutions and understanding the potential value changes in the company.
The $20,000 in the example represents the total value of the equity granted to each employee, not a monthly value. This is a one-time grant based on the current valuation of the company and the size of the dilution pool. This equity is typically subject to a vesting schedule, which might spread over several years.
For instance, if the startup uses a standard 4-year vesting schedule with a 1-year cliff, it means that an employee would need to stay with the company for at least one year to receive any equity (25% of the $20,000, which is $5,000 in this case), and then the remaining equity would vest monthly over the next three years. So, each month after the first year, the employee would vest 1/36th of the $20,000 until the full amount is vested at the end of four years.
The 12-month period mentioned on above-mentioned information (time until the next funding round) does not directly affect the amount of equity granted per employee. It’s more relevant for the company’s planning, as the next funding round might result in further dilution if more capital is raised.
Disclaimer: There is no financial or non-financial advice in any way and in any context in the content we produce. This is just research or personal opinion
