I typically give them a matrix of options (e.g., big cash/low equity, medium cash/medium equity, low cash/high equity), and let them pick what works best for them. And, worth mentioning, equity should only be given to employees you deem are full-time, long term partners of the business (not part-time contractors that may come and go over time).
Please note, the above equity grants assume you are motivating non-founding employees who are taking a salary. The equity stakes could be much higher for founders not taking salaries, which I have detailed general rules of thumb in this other post.
Structural Considerations
And, when we talk about giving equity, there are many structural considerations. Unless they are a co-founder at the time the company is formed, giving an employee stock outright has two problems:
(i) the recipient and the company will both have immediate tax implications, as the stock grant would be treated like immediate compensation; and
(ii) if that employee quits tomorrow, you don’t want them to walk away with the equity.
So, to address these issues, you would set up a stock option plan, or something similar, where the employee:
(i) has the right to purchase equity at today’s fair market value; and
(ii) the options have a vesting schedule with the employee’s purchase rights being earned over time (e.g., over four years, 25 percent of the grant is earned in each year).
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