How many shares should you grant employees?

Many companies are unsure how many shares to give employees. Not because they do not want to be generous, but because they do not know what the future will bring and how many they will need for people who join later.

In this article we work it out with virtual shares: employees share in the value growth of the company, and the shareholder register stays as it is.

In short: there is no fixed percentage that fits everyone. Work backwards from a realistic future picture, make grants today that still make sense in that picture, and keep room for later grants.

Approach

Start from the company you want to be

The most useful approach is to work backwards. Instead of asking "how much do I give this person?", start at the end point:

1. Pick a realistic scenario. For example: selling the company for €30 million within five years.
2. Sketch the organisation you need for it. How many people work there at that point, and in which roles?
3. Decide what you want to share. What part of the value growth do you want to share with participants, and how do you divide it across the roles?

That gives you a picture of who gets what. Some people already work for you, others you have not hired yet. Give current employees a grant that still makes sense in that future picture. That way you avoid giving away too much at an early stage.

Pool

How big should the pool be?

The pool is the total number of virtual shares you make available for all participants together, now and later. In practice we often see companies start with 10% or 15%. Treat that as a starting point, not a market standard. The right size depends on your growth plans, the number of people you want to include and how important the participation is in their total reward.

A 10% pool is not 10% of the value

A 10% pool does not automatically mean participants are together entitled to 10% of the company's value. What they eventually receive also depends on:

• The starting value. With SARs, participants only share in value growth above an agreed starting value.
• Vesting. How much has been earned at the moment of payout. Read more about vesting.
• Payout conditions. When there is a payout, and whether a cap or hurdle applies.
• Dilution. What happens with new funding rounds or a larger pool.

Grant

How much does one employee get?

There is no universal percentage per role. Tables with fixed percentages per job title give something to hold on to, but rarely fit your situation. Look at these factors instead:

• The role. How much influence does this person have on the company's value?
• The contribution. What has someone already brought, and what do you expect in the coming years?
• The place in the total package. Is the participation an extra reward, or a substantial part of the package, for example because the salary is below market?
• The moment of joining. Someone who joins early takes more risk than someone who joins later.

Not every participant needs the same grant or the same conditions. Co-founders, for example, often receive different grants than employees. Just make sure you can explain the differences.

Room

Keep room for later

Do not give everything away at once. Use several grants over time instead, possibly linked to performance. That keeps room to reward people again, and to make new key people an attractive offer.

A good plan often combines three kinds of grants: an acquisition grant for new key hires, performance grants linked to goals, and loyalty grants for people who stay.

What if the pool runs out anyway? Then you can enlarge the pool, and the board decides how the extra economic dilution is allocated. That works, but it is easier to stay ahead of that moment by reserving part of the pool from the start.

Growth

Growth, funding rounds and dilution

Virtual shares do not change the legal shareholder register. At exit there is economic dilution, though: the proceeds are shared between shareholders and participants.

When a funding round comes, the question is how it affects existing grants. Settle that upfront in the plan rules, so participants know where they stand and you do not have to negotiate afterwards about what happens to their grant.

Example

Worked example: dividing a 10% pool

Say you are aiming for a sale at €30 million within five years, and you choose a 10% pool. With fully vested, full value virtual shares, no starting value and no dilution, there is €3,000,000 to share in that scenario. One possible allocation:

The current team gets 3.5% of the pool together. The rest is deliberately not granted yet: there is room for a CTO or head of marketing you still need to hire, and for extra grants to people who make the difference. Had you given the commercial lead 5% today because it felt fair, there would be little left for the people you still need.

In Sharesquare you can try out allocations like this with the exit calculator, and see per participant what a grant delivers in your scenario.

This example is illustrative: the percentages and amounts are not a guideline or market standard, and do not take tax into account.

Communication

Put it in writing and explain it

Do not promise a fixed percentage verbally before the plan is in place. Put agreements in writing early and clearly, so there is no disagreement later about what was promised.

If an employee feels the offer is not generous enough, the future picture helps in that conversation too. You can show where your strategy is heading, what role that person plays in it, and what the grant could be worth in a realistic scenario. An amount in euros, with the assumptions next to it, usually says more than a percentage of something that is not clear.

Sharesquare provides software and knowledge, not legal or tax advice. Have the tax consequences of your plan reviewed by your own adviser.

Knowledge base

Frequently asked questions