Equity Compensation Structures

The 8-Box Framework For Comparing the Value of Equity Grants The best perk of my job is that friends from all walks of life reach out to me as their official compensation negotiation coach. “Matt, I have two offer letters. Google is offering me $300k of RSUs and Alaska Heli Skiing LLC is offering me $150k of ISOs. That means Google’s offer is twice as good, right?” Almost always, my response is “we need more details first”. Meanwhile, I see companies glaze over the basics of equity grant communication which leads to even more employee confusion. And to be clear, the confusion is seldom due to malicious employer intent; it is usually a result of the underlying complexity of equity compensation. ____________________________________________________ Here is a basic, two question framework I use with friends and employers alike when valuing private company equity grants: 1️⃣ What is the vesting duration? 2️⃣ Is this a gross, net, 409a, or percentage amount? If you’re valuing a grant from a private company, answering these two questions will yield one of the following 8 boxes. Knowing which “box” you’re in (or which you’re communicating to employees) is a vital but frequently misunderstood concept.                   GROSS | NET | 409a | PERCENT TOTAL    |        A     |    B   |    C   |        D ANNUAL |        E     |   F    |    G   |        H ✅ Total vs. annual – many grants have a 4 year vesting schedule, but some are shorter or longer. And some more innovative companies (e.g. Lyft, Stripe) are now experimenting with AVGs (annual value grants). Know if you’re talking in total or annual terms. ✅ Gross – this usually refers to valuing each share based on the most recent “investor price” (aka preferred price). It can be confusing since it implicitly applies a preferred share price to a common share if the grant is from a private company. ✅ Net – This refers to the difference between the most recent investor/preferred price and the most recent 409a/FMV (fair market value)/common price. Confusingly, common shares sometimes transact closer to (or even above) the preferred share price depending on market demand 🤯 ✅ 409a – this refers to the most recent 409a/FMV/common share price. ✅ Percent – this is looking at the percentage of fully diluted ownership you would have if you were to vest (and exercise, if relevant) 100% of the shares while also assuming the fully diluted share count of the company today. Note that the actual ownership percentage in practice might be lower if you leave before you fully vest, if you don’t fully exercise all shares that vest, and/or if the company takes on additional dilution over time (which is likely). ____________________________________________________ Attached is an example of the 8-box framework for P3 SWE benchmarks. Comparing two different boxes when comparing two equity grants is an apples to bananas comparison. Do not do this. Instead, use the 8-box framework. #pave #data #equitycompensation

There’s no such thing as an equitable equity structure in Professional Services. In every Partnership or management equity plan, there are winners and losers. More often than not, it’s the next generation of leaders, Principals, Senior Managers, high-performing non-equity Partners, who end up subsidizing the upside of those who came before them. They’re driving growth, taking on commercial risk, managing key client relationships… all while waiting for a seat at the table that keeps getting further out of reach, or never arrives at all. Meanwhile, legacy Partners continue to benefit from discretionary bonus schemes, outdated profit shares, and retirement-triggered liquidity events, none of which reflect current contribution or value creation. And this isn’t just an issue of fairness. These legacy structures are actively holding firms back, creating misalignment, eroding retention, and exposing serious risk around succession and leadership continuity. But the model is changing, and fast. Drawing on data from over 200 firms that have moved beyond traditional Partnerships, we’ve found that more than 60% of non-equity leaders in PE-backed firms now participate in structured value sharing programs. In many cases, we’ve seen payouts of 3x or more base salary at exit, without a single share being issued. Tools like phantom equity, B-units, and deferred bonuses with uplift multipliers have become standard in high growth platforms. These models reward real performance, strengthen retention across the investment cycle, and scale with the business, without the complexity or dilution of conventional equity. So, what’s driving the shift? A sharper alignment between compensation and business performance. A stronger emphasis on succession planning and leadership development. And, perhaps most importantly, a growing recognition that “wait your turn” is not a viable talent strategy. Firms that fail to evolve are losing their best people to platforms that offer clarity, upside, and a genuine pathway to long-term reward. At a time when leadership talent is harder to retain than ever, compensation needs to reflect future value creation, not just past loyalty. The firms that get this right aren’t just staying competitive, they’re building cultures that scale.

Over the last few weeks, there have been multiple leaders in our network asking about equity vesting schedules and if we’re seeing any trends. Here’s what I’ve hearing from leaders in our community: 👉 Private companies are evaluating shorter vesting schedules, but few are executing on these ideas due to the legal and admin challenges of changing equity plans. 👉 Bottom line: there is increasing pressure from Boards to limit dilution rates and burn, but Pre-IPO Tech companies are sticking to the typical 4-yr vesting schedules with 1-yr cliff for new hire grants and refreshes with monthly vesting over two years with no cliff. However, alternative approaches by 'outlier companies' are emerging. ➡ Stripe, Lyft, and Coinbase adopted one-year vesting schedules (https://lnkd.in/eYKv_vGB) ➡ OpenAI has PPUs that provide employees with a % of profits ➡ Pinterest and DoorDash have front-loaded splits over 3 and 4 yrs respectively, which is in contrast to Amazon’s back-loaded splits Why would companies consider shorter term vesting schedules? Companies move to a shorter term to reduce their 'stock based compensation' expense or burn, but a flaw can emerge if companies go this direction and commit to fixed annual grant values. If the stock price significantly declines, the company will be need to issue more shares to deliver the same value. How do you stay informed of trends? There are well established benchmarking providers for different forms of cash compensation like Radford for broad based compensation, Compensia for executive compensation, and Alexander Group for sales incentive compensation. Equity benchmarks can be much more elusive… especially for private companies. The good news is that there are now compensation platforms like Kamsa, Complete (YC W22), Pave, Compa, and Levels.fyi that help to understand what’s going on in your company and in the market. VC firms share insights from portfolio company surveys like the General Catalyst survey on equity refreshes (credit to Guissu Baier): https://lnkd.in/eniMAPNu So how do you make sense of all of this as a talent leader? 1️⃣ Be curious and learn about different aspects of equity. ⭐ Options vs RSUs: https://lnkd.in/e3HESBXN ⭐ PPUs: https://lnkd.in/ezdRkjtn ⭐ Traditional vesting schedules: https://lnkd.in/ePB2ZQqn ⭐ Unique vesting schedules: https://lnkd.in/eUrDZCUe ⭐ Preferred vs 409A valuation: https://lnkd.in/e3x7w72s 2️⃣ Stay on top of trends from competitive offers, track them, monitor impacts to offer acceptance rates, and most importantly partner with your Comp team as your company designs its program for new hires and employees. 3️⃣ Build your network with other talent leaders. 4️⃣ Follow leaders that are sharing insights on how the market is evolving like Charlie Franklin (CEO at Compa), Matt Schulman (CEO at Pave), and Zuhayeer Musa (Co-founder at Levels.fyi).

We've been having a lot of conversations lately about equity grants for early stage companies and how early decisions can have long term impacts on your cap table. A few important things to keep in mind (not an exhaustive list!): ✅ At the early stage of a company, we love to see all employees (not just senior hires) receive equity as part of their compensation package. This rewards all for their contributions, gives everyone the potential to participate in upside and keeps everyone aligned on working hard toward towards the mission and success. ✅ Just like you would put all employees on a vesting schedule (most commonly, a 4 yr vest with a 1 year cliff), it's super important that all founders be on a vesting schedule as well. Same for GPs at funds - when Brett Brohl and I raise our funds, we put ourselves on a 6 yr vest (to match the duration of our fund's investment period) as a commitment to our LPs that we'll be the ones stewarding the capital. Consider the scenario where 3 co-founders start the business and let's say they spilt equity evenly, 1/3 each. If after a year, one founder leaves for any variety of reasons, they are walking away with that equity. We call that "dead equity" on the cap table. Not only is that not fair to the team still working and building for the next 5-10 yrs, but it can present some challenges when raising venture capital. Note too that as your raise subsequent institutional rounds, investors often require founders to reset vesting. This is because those investors want to ensure the founders they are backing today are the ones building for awhile to come, and aligning incentives. ✅ Option pool. These employee stock option pools typically get refreshed which each round of funding, so factor that in when thinking about the cap table long term. We like to see the option pool reset to at least 10% in each round so that there is enough equity available to make key hires and to top-up superstar performers. ✅ We love to see founders/operating management team own a combined 50-75% of the company still after the seed round (as I've shared in previous posts). If you're a founder negotiating with seed stage investors and going to drop below this, push for a top-up during that round to get you over that 50% number. When getting into deeper diligence with a company for Bread and Butter Ventures, I ask to see the cap table, and my eye immediately goes to these areas: 1) how much do they founders own collectively, and does the ratio make sense relative to roles 2) how big is the current option pool 3) do all employees have equity and 4) are there any unusual grants (like non-operating folks, advisors, or former employees with outsized grants). Cap table challenges aren't insurmountable, but helpful to have a clean slate to start. #earlystage #venturecapital #equity #ESOP #seedstage #captable

Are you trying to ensure your key employees don’t jump ship? Many RIA owners struggle with how to reward and retain top talent without giving away actual ownership in the firm. The good news is that there are creative tools available that give employees a sense of participation in the firm’s growth while allowing you to maintain full control. One such tool is the use of profits interests. This structure gives employees the ability to participate in the future upside of the business without handing over any current equity value or management rights. In practice, it means they only share in growth from the point of the grant forward, which makes it a flexible and appealing way to reward loyalty and long-term performance while keeping ownership clean. Another approach that has become popular is phantom equity. Phantom equity mirrors the economics of actual equity but does not make the employee a legal owner. Instead, it promises cash payments tied to the value of the firm or its revenues at some future date. Employees feel like owners because their financial rewards rise as the firm grows, but you avoid the complications of actually issuing units or stock. Also, some firms turn to bonus compensation triggered by a change of control. This means that if the RIA is ever sold, certain employees are rewarded with a cash payout tied to the sale proceeds. For employees, it creates a clear incentive to stay engaged and help drive growth leading up to a potential transaction. For owners, it creates a retention hook that keeps the team committed until the moment the firm’s value is realized. These structures not only align employee incentives with the success of the firm, they also create a culture where key people feel they are truly invested in the future. The important part is getting the design right so that the plan motivates your team, protects the firm, and is tax efficient for everyone involved. We help RIAs structure these kinds of programs. If you are looking for a way to reward loyalty, retain top performers, and strengthen the long-term stability of your firm, now is the time to explore these options. Let’s talk about how to tailor an incentive plan that works for your business and secures the future of your most valuable asset—your people.

Navigating equity compensation for early employees can be challenging for startup founders. After unsuccessfully searching for an approach we felt comfortable sharing with founders, we decided to create one ourselves. Today, we're excited to share a new framework to make sizing equity grants easy and transparent for founders. In this post, we cover: -🔍 Key questions to ask when creating early equity grants -📊 Important definitions and concepts -💡 Guidelines for equity allocation, including multipliers, premiums, and discounts -📈 Tips for managing equity as your company grows -🧮 An easy-to-use equity calculator to perform this exercise on your own Whether you're a Pre-Seed, Seed, or Series A founder, this guide will provide you with the information needed to confidently make informed decisions about equity grants for your team. https://lnkd.in/gji_pU6s

Equity compensation can be an incredible wealth builder… Or a tax disaster if you don’t understand how to manage them Here’s a high-level breakdown of the most common forms I see with executives and high earners 👇 1. RSUs (Restricted Stock Units) They are taxed as ordinary income on the vest date Most companies withhold a flat amount (often 22% or 37%), which can be very wrong You need to understand that taxes are due immediately, whether you sell or not Key question to ask on buying vs selling decision: If someone handed you that amount of cash today, would you buy this stock? If the answer is no, holding the RSUs probably isn’t the right move. And remember, your future RSUs have the price changes built into them 2. ISOs (Incentive Stock Options) No regular income tax on exercise, but you have to worry about AMT AMT can be triggered, creating a surprise tax bill for many This is why early exercising before the stock has grown much can be powerful but only with proper AMT modeling The risk: - You can pay tax on paper gains for stock that Never becomes liquid - It Declines in value - Or never has a successful exit This requires real planning, not guesswork 3. NSOs (Non-Qualified Stock Options) Taxed as ordinary income at exercise on the spread Early exercising can reduce income taxes But it also means paying tax before certainty exists The risk... Paying income tax on something that ultimately becomes worthless. Equity compensation is not “free money.” It’s a series of: - Tax decisions - Cash flow decisions - Concentration risk decisions What works for one person can be completely wrong for another

There’s a little-known gotcha in employee equity compensation… The default exercise window for most companies is a 90 days. You work for years, vest your stock, and then if you leave, you’ve only got three months to come up with hundreds of thousands of dollars to exercise- or you lose it all. Think about how absurd that is. The equity is already earned. It’s supposed to be ownership. Yet, in practice, it surprises former employees and quietly shifts value back to the cap table. Spenser Skates from Amplitude shared a great post about this problem - turns out there are other setups that are more employee-friendly, if you look into it. After consulting with lots of folks, we built our own policy: - After 1 year, employees get a 1-year exercise window - After 2 years, it extends to 3 years - After 3 years, it extends to 6 years - By 4 years, it’s 10 years This way, by the end of four years, you don’t just vest - you actually have a decade to exercise. There was a moment when 10-year windows were popular (like in Spenser’s post), but we found this was a good middle-ground that skews incentives towards those who stick around. We did this to make sure those who are committed to the company don’t get sidelined with a gotcha years down the line.

CEOs: "What should I pay my CMO?" CMOs: "Am I being paid what I'm worth?" The gap between those two perspectives costs businesses their best talent. I've pulled together the data from 1,000+ interviews with CMOs this year, into one comprehensive framework. A complete breakdown of base salary, bonus and equity; by stage, sector, and seniority. For founders and investors: You'll see exactly where to pitch your offer to secure top 10% talent without torching your runway. For marketing leaders: You'll finally know if you're being underpaid. The framework covers: Base salary ranges from Pre-seed to FTSE 100 How equity multiples actually work Which sectors pay 20% above market The expanded remit that unlocks another £50k Bonus structures that drive real performance If you want to see what you (or your next hire) should be paid, let me know, and I'll send it over.

Are you giving up too much equity to your early hires? Or maybe not enough? 🤔 We've been analyzing data from thousands of startups across APAC & ME, and the results are quite eye-opening, especially if you are an employee looking to join an early-stage startup... 𝗧𝗟𝗗𝗥: 𝗘𝗾𝘂𝗶𝘁𝘆 𝗴𝗿𝗮𝗻𝘁𝘀 𝗱𝗿𝗼𝗽 𝘀𝗶𝗴𝗻𝗶𝗳𝗶𝗰𝗮𝗻𝘁𝗹𝘆 𝗮𝗳𝘁𝗲𝗿 𝘁𝗵𝗲 𝗳𝗶𝗿𝘀𝘁 𝟯 𝗵𝗶𝗿𝗲𝘀, 𝘄𝗶𝘁𝗵 𝘁𝗵𝗲 𝗳𝗶𝗿𝘀𝘁 𝗵𝗶𝗿𝗲 𝗿𝗲𝗰𝗲𝗶𝘃𝗶𝗻𝗴 𝟰𝘅 𝗺𝗼𝗿𝗲 𝗲𝗾𝘂𝗶𝘁𝘆 𝘁𝗵𝗮𝗻 𝘁𝗵𝗲 𝟭𝟬𝘁𝗵. The median equity grants to first 10 hires in APAC & ME (as of Q1 2025): Hire #1: 0.339% Hire #2: 0.190% Hire #3: 0.176% Hire #4: 0.101% Hire #10: 0.080% There's a dramatic cliff after the third hire, with equity grants nearly halving. This pattern raises several important strategic questions for founders: 𝟭) 𝗩𝗮𝗹𝘂𝗲 𝘃𝘀. 𝗰𝗼𝗻𝘃𝗲𝗻𝘁𝗶𝗼𝗻: Are early hires genuinely creating that much more value, or is this simply following established patterns without strategic thought? 𝟮) 𝗧𝗮𝗹𝗲𝗻𝘁 𝗿𝗲𝘁𝗲𝗻𝘁𝗶𝗼𝗻: How does this equity distribution affect your ability to attract and retain key talent beyond those first few hires? 𝟯) 𝗢𝘄𝗻𝗲𝗿𝘀𝗵𝗶𝗽 𝗰𝘂𝗹𝘁𝘂𝗿𝗲: Are later employees less invested in outcomes when their equity stakes are significantly smaller? At Carta, we regularly see how ownership can transform employee engagement and loyalty. These benchmarks will help you make more informed decisions about your own equity distribution strategy. If you're a founder or people leader in APAC & ME, this is data you won't want to miss. Download the complete Startup Equity & Workforce Report for APAC & ME here: https://lnkd.in/gXjbc4_s #equitycompensation #startuptalent #founderadvice #techhiring