Equity is now a critical part of the compensation package for thousands of startup employees in Europe. But the many varying regulatory frameworks, business cultures, and startup hubs found in Europe have historically made it difficult for companies to navigate equity benchmarks.
As a European startup serving customers in more than 40 markets around the world, and having expanded from our home market of Switzerland to three European hubs – Zürich, London and Berlin – we’ve had to create an equity benchmarking model that will scale with us as we grow in the months and years ahead.
What is equity benchmarking?
Equity benchmarking is the process of evaluating how much equity a company should offer to its employees. The goal is to create a fair and ambitious compensation structure that can scale alongside your company, helping you continue to incentivise established and new team members as you grow.
One of the primary reasons it's so challenging to arrive at solid equity benchmarks in early-stage companies is that every company has its own unique set of circumstances, with many variables that can affect employee equity allocations, like
- Strike prices and percentage allocations (which change as the company grows)
- The company’s hiring roadmap
- The funding stage it is at
- Equity regulations in the country / countries the company operates in
- The size of the employee equity pool approved by the board
For instance, Index Ventures’ OptionPlan adjusts its auto-generated benchmarks based on factors as diverse as the depth of the tech a company is building and the desired exit valuation.
It’s worth remembering why it’s important to get equity benchmarks right. In Europe, candidates are increasingly knowledgeable about what their expected compensation will be, including the equity component. If you offer below-market equity allocations, candidates are less likely to choose to commit to you for the next years of their career.
Failing to set up a strong equity plan early on can make life a lot harder down the line for finance, people and operations leaders. The power of equity to attract and retain great talent becomes especially clear when you aren’t able to do so effectively.
Establishing your employee equity pool
When you’re benchmarking equity, it’s critical to start with your employee equity pool. If you don’t understand how much of the company you plan to allocate to your employees, you won’t be able to define how much equity you want to give to new hires. You’ll also find it hard to calculate new refresher grants for existing employees who get promotions.
In our 2023 State of Equity and Ownership report, we surveyed 1,200 founders and operators in the United States, United Kingdom, France and Germany. We found that in Europe, it's most common to offer between 10% and 15% of company stock to employees. In the US, on the other hand, option pools are more generous: it's most common to allocate employee option pools of between 15% and 20%.
Types of benchmark
There are actually a number of different ways for companies to approach the problem and arrive at a fair and equitable equity benchmarking structure. I’ll also share some detail about how we do it ourselves at Ledgy.
Probably the most common methodology when benchmarking equity is to allocate equity based on a multiplier of each employee’s salary. For example, if you decide that on a junior level you allocate 0.2x of their salary in equity, a junior engineer on a salary of €60k would get 20% of that in equity value, i.e. €12k worth of share options.
Usually, senior employees get higher multipliers than junior employees, and it’s generally the case – especially in the US – that technical employees get higher multipliers than non-technical team members. This doesn’t always have to be the case: at Ledgy, we actually don’t have different equity multipliers for our different technical and non-technical functions.
Location can make a difference. Based on data and industry norms, a new employee joining your company in San Francisco would probably ask for and expect a higher multiplier than an employee based in Berlin. It’s up to you whether you go for location-adjusted multipliers, or whether you decide to have one approach that will apply across geographies.
At Ledgy, we decided to make equity allocations independent of location. We take the average salary for a job function across the locations where we’re active and base our equity calculations on that average. We took the view that equity isn’t tied to the cost of living like salary. Instead, it’s long-term ownership for employees that isn’t tied to your daily expenses.
Because salary is often very important for determining equity allocations, it's wise to use a compensation benchmarking tool to make sure your salaries reflect market reality. More on this in the 'Peer comparisons' section!
It’s best practice to start with a 10% pool at seed stage, and plan to increase the size of the pool successively at each funding round, ending up somewhere between 15% and 25% at late stages (taking into account dilution). (You can read more of our thoughts on structuring your employee pool in our separate deep dive!)
So if you want to be more ‘aggressive’ and give top-of-market equity by aiming to match US equity benchmarks, where do you start? The model I created when designing Ledgy’s own employee option pool could help you structure your own thinking. It helps you weigh up the impact of bringing new people into the business using the salary multipliers you’d expect to give people according to their seniority. (More on this in the next section.)
First ten employees get 1% each
This one is for very early-stage companies and it does what it says on the tin: your first ten employees in total get 10% of the company, with variations in the individual allocations based on seniority or how central the role is. By allocating 10% to your first 10 employees, you’re ensuring that you’re recognizing the skills, ambition and risk appetite of your earliest team members.
Of course, you’ll need to plan out an equity benchmarking structure once you’ve hired your first 10 employees. But on the operational side, it creates a simple cap table early on. And, it’s relatively easy to implement for an early-stage company, potentially saving you time setting up an elaborate equity scheme with multipliers as described above.
Learn about our cap table management software here.
Finally, as the startup ecosystem matures in Europe, it’s never been easier to get authoritative data on how similar companies are tackling the benchmarking problem.
More companies are adopting benchmarking software products, which gather data from businesses of different sizes and stages to help startups work out how their peers have approached the problem. More companies are building out datasets for equity compensation: Ravio, Pave and Figures are just a few examples. (Disclaimer: Ledgy partners with each of these solutions and customers can access special discounts! Ask our team for more info.)
How benchmarking works at Ledgy
At Ledgy, we want to practice what we preach. As a company that lives and breathes equity, it was vital for us to land on a benchmarking and pool planning model (feel free to copy and use for yourself) that would work as we grew.
We plan with steadily increasing the size of our employee option pool over time, usually during funding rounds. This might mean an increase of between 5% and 10% after each funding round. Then, we can build out ‘base case’ and ambitious scenarios in terms of the hiring plan, checking whether the equity pool allocations work in these scenarios.
We also give ‘refresher’ grants for promotions, as it’s important to us not to let people’s equity stagnate when their salary and responsibilities might be increasing. When someone moves up a level in our progression framework (see below), they are awarded the difference in equity allocation between the levels, at the latest valuation at time of promotion.
In the interests of transparency, one of our core values, we share our equity percentages and salary multipliers internally with the whole team. And now, also with you! These multipliers are based on levels 1 through to 6, where 1 is entry-level and 6 is Director (one level below VP, and two levels below C-suite).
Important note: these multipliers are averages. They do not take account of technical / non-technical variables, location-based adjustments, or the most senior hires at VP and C-suite, where there must still be room for case-by-case negotiations.
The allocations increase on a near-logarithmic scale as levels increase, reflecting the outsize contributions and ownership areas of more senior hires.
Equity benchmarking can really be a strategic growth lever as you scale. It can help you retain great people and attract the best talent to your company. There are more resources and methodologies than ever to choose from when determining the strategy that works for you.
Do you have feedback or comments on the models and strategies we opted for when designing our own equity policy at Ledgy? If so, let us know! And good luck in your own benchmarking work.
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