Incentivising long term performance with equity ownership
Startups often cannot match large-company salaries in cash. Equity lets a company offer a share of future value in exchange for lower current pay, and it aligns employee incentives with long-term company performance rather than short-term output.
Equity grants are also a retention tool. A four-year vesting schedule with a one-year cliff means an employee only starts earning shares after a year, and only fully vests after four, which discourages early departures.
Common European equity and phantom share structures
- Stock options: the right to buy shares later at a fixed strike price, common in the UK, Ireland and Germany
- Restricted shares: real shares granted upfront, subject to vesting and often a repurchase right if the employee leaves
- RSUs (restricted stock units): a promise to deliver shares later, common at more mature or US-influenced companies
- Phantom shares: a cash bonus tied to share value, used when issuing real equity is impractical
- Growth shares: a UK share class that only shares in value created above a set hurdle
The right instrument depends heavily on local tax rules. Options that are tax-efficient in the UK under EMI can be taxed very differently in Germany or the Netherlands, so the same template rarely transfers across borders unchanged.
Sizing individual grants
Early employees typically receive larger grants than later hires because they take on more risk and join before the company has proven its model. A common approach is to set grant size as a percentage of fully diluted shares, banded by seniority and start date.
| Hire order | Role | Typical range (% fully diluted) |
|---|---|---|
| First 5 hires | Engineer or senior operator | 0.5% to 2.0% |
| Hires 6 to 20 | Mid-level | 0.1% to 0.5% |
| Hires 20+ | Standard | 0.02% to 0.15% |
| Executive hire (any stage) | VP or C-level | 0.5% to 2.5% |
Communicating equity to employees
A grant is only motivating if the employee understands it. That means explaining the strike price, the vesting schedule, what happens on leaving the company, and roughly what the shares could be worth in different exit scenarios, without promising a specific outcome.
How employee equity questions usually start
- Do all employees get the same type of equity?
- Not necessarily. Companies sometimes use options for most staff and restricted shares or growth shares for senior hires, depending on tax treatment and cost.
- What happens to employee equity if the company is acquired?
- This depends on the grant agreement. Many include acceleration clauses that vest some or all unvested equity on an acquisition, known as single or double trigger acceleration.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.