What is a Fair Equity Agreement For a Startup?

[Canary Wharfian]

Determining a fair equity agreement for a new startup depends on several factors, including the startup’s stage, valuation, funding amount, market norms, and the roles or contributions of the parties involved (e.g., founders, employees, investors, or advisors). Below, I’ll outline general principles and benchmarks for equity agreements in early-stage startups, focusing on common scenarios (founders, early employees, advisors, and investors). Since startups vary widely, these are guidelines based on industry norms as of 2025, and you should consult legal or financial experts for specifics.

Key Factors Influencing Equity Agreements​

1. Stage of the Startup:
   • Pre-Seed/Seed: Very early, often pre-revenue, with higher risk. Equity grants are larger to compensate for uncertainty.
   • Series A and Beyond: More established, with lower equity grants due to reduced risk and higher valuations.
2. Valuation: The startup’s valuation determines how much equity a given investment or contribution is worth. For example, $100K for a 10% stake implies a $1M valuation.
3. Contribution: Equity reflects the value someone brings—cash (investors), expertise (advisors), or time/skill (founders/employees).
4. Market Norms: Industry standards in the startup’s region (e.g., Silicon Valley, NYC, or emerging markets) influence expectations.
5. Vesting: Equity is typically subject to vesting (earned over time, usually 4 years with a 1-year cliff) to align incentives and protect the company.

Equity Agreements by Stakeholder​

Here’s how equity is typically allocated in a new startup:

1. Founders​

• Typical Equity Split: 50-80% of the company is split among founders at the pre-seed stage, with the rest reserved for investors and employees.
• Fair Split Considerations:
  • Equal vs. Unequal: Equal splits (e.g., 50/50 for two founders) are common when contributions are similar. Unequal splits (e.g., 60/40) reflect differences in role, experience, capital contribution, or idea origination.
  • Factors: Who’s full-time? Who brought the idea? Who has critical skills (e.g., tech vs. business)? Who’s funding initial costs?
  • Example: Two founders might split 50/50 if both are full-time and equally critical. If one provides the idea and funding, they might take 60-70%.
  • Best Practice: Use a vesting schedule (e.g., 4 years, 1-year cliff) to ensure commitment. Discuss roles and expectations upfront to avoid disputes.
• Tool: Frameworks like the Slicing Pie model dynamically adjust equity based on contributions (time, cash, etc.) until a formal agreement is set.

2. Early Employees​

• Typical Equity Range:
  • First 5-10 Employees: 0.5-2% each, depending on role and seniority.
  • Key Hires (e.g., CTO, Lead Engineer): 1-5% if critical to the startup’s success.
  • Junior Hires: 0.1-0.5% for early non-critical roles.
• Factors:
  • Role Importance: Technical roles (e.g., engineers in a tech startup) often get more equity than non-technical roles.
  • Risk: Early employees take bigger risks (lower salaries, unstable company), so they get more equity than later hires.
  • Market: In competitive markets like Silicon Valley, equity grants may be higher to attract talent.
• Example: A founding engineer at a pre-seed startup with a $5M valuation might get 1-2% equity (vesting over 4 years), while a marketing hire might get 0.3-0.7%.
• Best Practice: Use an employee stock option pool (10-20% of total equity) to allocate shares to employees. Grant equity with vesting to retain talent.

3. Advisors​

• Typical Equity Range: 0.1-1% for standard advisors, up to 2-5% for high-profile advisors with significant contributions (e.g., industry experts, serial entrepreneurs).
• Factors:
  • Time Commitment: Advisors typically commit a few hours per month, so equity is lower than for employees.
  • Value Add: Advisors with unique expertise, networks, or credibility (e.g., intros to VCs) command higher equity.
  • Stage: Early-stage startups offer more equity due to higher risk and lower cash.
• Example: A technical advisor helping a pre-seed startup with product development might get 0.25-0.5% equity, vesting over 1-2 years.
• Best Practice: Use an advisor agreement with clear deliverables (e.g., X hours/month, specific tasks) and vesting to ensure alignment.

4. Investors (e.g., Angels, VCs)​

• Typical Equity Range:
  • Angel Investors: 5-20% for seed investments ($50K-$500K), depending on valuation and amount.
  • VCs (Seed Round): 10-25% for $1M-$5M investments in seed rounds.
  • VCs (Series A): 15-30% for $5M-$20M investments, often diluting earlier stakeholders.
• Factors:
  • Valuation: Equity is inversely proportional to valuation. A $500K investment in a $5M valuation startup yields 10% equity; at $10M valuation, it’s 5%.
  • Round Size: Larger rounds dilute founders/employees more but bring more capital.
  • Investor Value: Investors offering strategic help (e.g., intros, expertise) may negotiate better terms.
• Example: An angel investing $100K in a startup valued at $2M post-money gets 5% equity. A VC investing $3M at a $15M valuation gets 20%.
• Best Practice: Use convertible notes or SAFEs (Simple Agreement for Future Equity) for early investments to delay valuation disputes. Ensure clear terms on dilution and board seats.

General Guidelines for a Fair Equity Agreement​

1. Align Contributions and Risk:
   • Equity should reflect the value each party brings (time, money, expertise) and the risk they take (e.g., early employees forgo stable salaries).
   • Avoid over-diluting founders too early; maintain enough equity to incentivize them through multiple rounds.
2. Use Vesting Schedules:
   • Standard: 4-year vesting with a 1-year cliff (no equity until 1 year, then monthly/quarterly vesting).
   • Protects the company if someone leaves early.
3. Set Aside an Option Pool:
   • Reserve 10-20% of equity for future hires to avoid excessive dilution later.
   • VCs often require this before investing.
4. Negotiate Valuation Carefully:
   • Higher valuations reduce dilution but can make future rounds harder if growth doesn’t justify it.
   • Use market comps (e.g., similar startups in your sector) to set a fair valuation.
5. Transparency and Documentation:
   • Use legal agreements (e.g., term sheets, stock purchase agreements) to avoid disputes.
   • Tools like Carta or Capshare help manage equity allocation and cap tables.
6. Market Benchmarks:
   • In the U.S. (2025 data), seed-stage valuations range from $2M-$10M, with angels taking 5-15% and VCs 15-25%, per PitchBook.
   • Employee equity grants are higher in tech hubs (e.g., SF, NYC) than in emerging markets.

Example Equity Split for a New Startup​

Scenario: Pre-seed startup, $3M post-money valuation, raising $500K from angels, with two founders and two early employees.

• Founders: 70% total (35% each, vesting over 4 years).
• Employee Option Pool: 15% (e.g., 1.5% for a lead engineer, 0.5% for a junior hire, vesting over 4 years).
• Angels: 16.67% ($500K / $3M valuation).
• Advisors: 1-2% total (e.g., 0.5% each for two advisors, vesting over 2 years).
• Remaining: ~5% for future hires or small angel rounds.

Tips for Fairness​

• Discuss Early: Founders should agree on splits before incorporating, considering long-term commitment and roles.
• Benchmark Against Peers: Research similar startups (e.g., via Crunchbase, AngelList) for comparable equity deals.
• Avoid Over-Granting: Don’t give away too much equity early; dilution compounds in later rounds.
• Get Legal Advice: Use a startup lawyer to draft agreements and avoid tax or legal pitfalls (e.g., 83(b) elections in the U.S.).
• Communicate Clearly: Ensure all parties understand vesting, dilution, and expectations.

If you have a specific scenario (e.g., your startup’s stage, funding needs, or team size), I can tailor the advice further. Want me to analyze recent X posts or web data for current equity trends in startups?