equity-management

Equity Management

Overview

Equity is the hardest-working tool in a startup's compensation arsenal — it aligns incentives across founders, employees, advisors, and investors. The mistake: treating equity as an afterthought, granting shares on napkins, and discovering during Series A that your cap table is a disaster. This skill covers the complete equity stack: cap tables, 409A valuations, option types, grant guidelines by role and stage, dilution modeling, and the tools that keep it all clean.

Authoritative Foundations

• Carta — Equity management platform and cap table benchmarks — Equity management platform and cap table benchmarks
• Pulley — Cap table management for startups — Cap table management for startups
• Fred Wilson (Union Square Ventures) — Employee equity — Employee equity
• Andy Rachleff (Wealthfront) — Equity compensation — Equity compensation
• Sam Altman — Employee equity — Employee equity
• Leo Polovets (Humba Ventures/YC) — Technical founder equity guide — Startup operating cadence — default alive, talk to users, launch fast.

When to Use

Trigger phrases: "set up cap table", "409A valuation", "option pool planning", "equity grant guidelines", "ISO vs NSO", "83(b) election", "equity for employees", "dilution modeling", "how much equity to give", "Carta vs Pulley"

Step-by-Step Process

Phase 1: Equity Types

Type	Who Gets It	Tax Treatment	Key Rules
ISO (Incentive Stock Option)	Employees only	No tax at exercise (AMT may apply). Capital gains if held 1yr+ after exercise, 2yr+ after grant.	$100K vest limit/yr. Must exercise within 90 days of leaving.
NSO (Non-Qualified Stock Option)	Advisors, contractors, anyone	Taxed at exercise (ordinary income on spread).	More flexible. No $100K limit.
RSU (Restricted Stock Unit)	Later-stage employees	Taxed at vest (ordinary income on FMV). No exercise cost.	Common post-Series B. Not great for early stage (taxed at vest even if illiquid).
Restricted Stock	Founders, very early employees	Taxed at grant (can be $0 if 83(b) filed). Capital gains on sale.	Founders should file 83(b) immediately.

Rule of thumb: Early stage → ISOs for employees, NSOs for advisors. Later stage → RSUs become more common.

Phase 2: 409A Valuation

What it is: An independent appraisal of your common stock's fair market value (FMV). Required by IRS to set the strike price for stock options.

When to get one:

• Before granting your first stock options (required by law)
• After every priced fundraising round
• Every 12 months (or when a material event occurs)
• Before an acquisition (the acquirer will require a recent 409A)

Cost: $1,000-3,000. Providers: Carta, Pulley, Aranca, Scalar.

The 409A discount: Common stock (what employees get) is valued at a discount to preferred stock (what investors buy). Typical discounts: 10-30% for early stage, narrowing at later stages.

Why 409A matters: If you grant options below FMV, both you and the employee face tax penalties. The IRS takes 409A seriously.

Phase 3: Option Pool Planning

Option pool sizing:

Stage	Pool Size	Who's in the Pool
Seed	10-15%	Future employees, advisors
Series A	15-20%	Expanding team — AEs, engineers, CS
Series B	15-20% (refreshed)	Scaling all functions
Growth+	10-15% (ongoing)	Refreshes, executive hires

Key insight: The option pool is created from pre-money shares at Series A. This means the dilution from the pool comes ENTIRELY from founders and existing shareholders, not from new investors. Negotiate for the SMALLEST pool your hiring plan requires.

Option pool calculator:

Pool Size = Sum of all equity grants to be made before next funding round
+ 20-30% buffer for hires you haven't planned yet

Example:
- VP Engineering: 1.5%
- 5 engineers: 0.25-0.5% each = 1.75%
- VP Sales: 1.0%
- 3 AEs: 0.1-0.2% each = 0.45%
- First Marketer: 0.4%
- CS Lead: 0.5%
- Buffer (30%): 1.4%
Total Pool: ~7.0% (round to 10% for Series A standard)

Phase 4: Equity Grant Guidelines

By role and stage (approximate, adjust for your situation):

Hire #	Role	Grant Range
Founder	CEO/CTO	25-50% each (with vesting)
1st	Founding Engineer	1-3%
2-5	Early Engineers	0.5-1.5%
1st	VP Engineering	1-2%
1st	VP Sales / CRO	1-3%
1-3	AEs	0.1-0.3%
1st	Head of Marketing	0.5-1.0%
1st	Head of CS	0.5-1.0%
1st	Head of Product	0.5-1.5%
50th	Senior Engineer	0.05-0.1%
Advisor	Individual	0.15-0.5% (2-year vest, no cliff)

When NOT to give equity:

• Contractors (pay cash, not equity — unless they're effectively a co-founder)
• Agencies (cash only)
• Part-time advisors who don't deliver (vesting protects you)

Phase 5: Cap Table Management

Your cap table must ALWAYS be current. A messy cap table kills fundraising and can kill an acquisition.

Cap table best practices:

1. Use cap table software (Carta, Pulley, AngelList Equity). NOT Excel.
2. Update immediately after every grant, exercise, or transfer.
3. Keep it clean: no "we'll figure out the details later" entries.
4. Model dilution before fundraising. Know exactly who owns what.
5. Get 409As on schedule. Don't let them lapse.

Cap table software comparison:

Tool	Best For	Cost
Carta	Funded startups, Series A+	$100-500/mo+
Pulley	Early stage, simple cap tables	Free-$100/mo
AngelList Equity	Early stage, integrated with banking	Free
Clerky	Incorporation + first cap table	$99 one-time

Phase 6: Secondary Sales and Liquidity

Can employees sell their shares?

• Early stage: typically no (shares are illiquid)
• Series C+: sometimes. Company may run a tender offer.
• IPO: yes (but lockup periods apply)

Founder secondary: Some founders sell 5-10% of their shares in later rounds to take money off the table. This is becoming more accepted. It reduces pressure to exit prematurely.

Output Format

EQUITY PLAN — [Company]

CAP TABLE: [link in Carta/Pulley]
Last 409A: [date]. FMV per share: $X. Next due: [date].

OPTION POOL: X% (X,XXX,XXX shares)
- Allocated: X% (X shares to X recipients)
- Available: X% (X shares remaining)

GRANT POLICY:
| Role | Grant Range | Vesting | Cliff |
|---|---|---|
| [role] | X-Y% | 4 years | 1 year |

UPCOMING GRANTS:
- [Hire/role] — [date] — [grant size]

Implementation Checklist

• 409A valuation current (within last 12 months)
• Cap table on Carta/Pulley (not Excel) and up to date
• All founders filed 83(b) within 30 days of share issuance
• Option pool sized to hiring plan + buffer through next funding round
• Equity grants documented with board consent
• Dilution model built for next 2 funding rounds
• Advisor grants on FAST template with vesting

Quality Check

Before delivering, verify:

• Output matches the user's stated request
• Named frameworks or sources are reflected in the recommendation
• The deliverable is specific enough for an agent to execute
• Any assumptions, risks, or dependencies are explicit
• No unsupported claims, invented facts, or private/internal references are included

Common Pitfalls

1. Cap table in Excel. Excel can't handle cap table complexity (option exercises, early exercises, multiple funding rounds). Fix: Carta or Pulley from day 1.

2. No 409A valuation. You're granting options at an arbitrary price = IRS penalties for you and your employees. Fix: 409A before first grant. Renew annually.

3. Nowhere near enough equity for key hires. "0.1% for our VP Engineering" won't close a candidate who can get 1%+ elsewhere. Fix: Benchmark against stage and role. Don't be stingy on your most critical hires.

4. Forgotten option pool at fundraising. You model dilution from the new round but forget the option pool refresh. Surprise: an extra 15% dilution. Fix: Model dilution including option pool. Negotiate pool size at term sheet stage.

5. Missing 83(b) for founders. Miss it and you owe tax on phantom income as your shares vest over 4 years. Fix: File within 30 days. Keep proof. This is the #1 unforced error in startup equity.

⚠️ Disclaimer

This skill provides general informational guidance based on publicly available frameworks and operator experience. It is NOT legal advice, accounting advice, tax advice, financial advice, insurance advice, or professional services advice.

Consult qualified professionals for your specific situation — attorneys for legal/equity matters, CPAs for tax and accounting, licensed brokers for insurance, and certified security assessors for compliance. This skill does not create a professional-client relationship. Use it as a starting point for research and preparation.

Execution Artifacts

• references/framework-notes.md — Named frameworks and reference tables
• templates/output-template.md — Deliverable shell for agent output
• scripts/check-output.py — Lightweight deliverable validator

Related Skills

• co-founder-dynamics — Founder equity splits
• fundraising-strategy — Dilution from SAFE/priced rounds
• first-hires-playbook — Equity as part of compensation
• legal-for-founders — 83(b), incorporation, stock plans
• financial-modeling — Dilution modeling in financial projections