How to design and model out an equity incentive plan
October 13, 2026 | Edition #33
Dear People person,
At startups, stock options—or "equity"—is talked about as the Holy Grail.
It's why everyone should be excited to build the company and get rich.
In reality, it rarely works out that way as 65%+ of startups fail.
Even for successful startups, many employees don't get rich from an exit (e.g., IPO) because only 1/3rd purchase their options and become shareholders, eligible to receive cash proceeds.
[Note: There are some M&A situations where vested unexercised options could retain value or convert to cash.]
Given all that, what are equity incentive plans really for and how do you design them to fulfill that purpose.
Why do startups offer stock options?
​Stock options are meant to serve as a long-term incentive to align the interests of the company and its eligible employees.
As the company becomes more valuable, the stock options become more valuable.
At early stage startups that are cash-constrained, they also help balance out high risk with potentially high upside for no short-term cash outlay.
However, if you've ever worked as a recruiter, you know that shockingly few people ask about or negotiate stock options as part of their job offer.
Why don't more employees value stock options?
​The average employee has no idea how stock options work in general, let alone the terms of their options (e.g., vesting schedule, strike price, etc.).
The role of their paycheck is obvious.
Get paid. Spend money. Build a rich life.
Stock options are more opaque. The value is less clear and it's spread out over a longer time horizon where the time-value of money comes into play.
If they're ISOs or NSOs (not RSUs), you also have to spend money upfront to purchase options that might or might not be worth anything in the future.
As a result, many people ignore stock options altogether.
As someone who's earned more than $500,000 from stock options across multiple companies, I find that sad.
Not all stock options will be valuable. But some will be.
As HR professionals, part of our job is to design equity incentive plans that allocate options in an equitable* manner and to help them make educated decisions about whether or not they want to purchase options in real-time or upon their termination.
*What it means to distribute options in an equitable manner will vary company to company, but it often means allocating it based on risk an employee takes on to join and the value an employee adds, specifically to boosting the enterprise value (EV) of the company over time.
If you're interested in learning more about how EV is calculated by investors, I highly recommend the book Narrative and Numbers: The Value of Stories in Business.
The role of an equity allocation table
​So, how do you decide how to distribute stock options?
Enter: The equity allocation table.
An equity allocation table outlines how many bps (basis points, a representation of 1/100th of 1%, or a way to represent small numbers without a ton of decimal points) are offered by company stage, role, and level.
Company stage: As a company matures, it becomes more stable and less risky to join.
As a result of maturity, the amount of equity offered to employees goes down.
It's a best practice to set points to re-evaluate how much equity is allocated. Common set points include financing, revenue, and/or headcount milestones (e.g., Series B, $20M ARR, 100 employees).
The change in equity allocated by company stage often results in the first 10 or so employees getting a large % of the total pool that will ever be allocated to employees.
It also has interesting implications for the other use of the word "equity" because early stage teams tend to be more homogenous, resembling founder demographics, which lean heavily male and white.
For a deeper dive on allocation of equity by demographics, check out this report from Carta.
Role: It has historically been common to sub-divide equity allocations by role: technical, non-technical, and (sometimes) sales.
It'll be interesting to see if and how this changes over time with the rise of AI disrupting the number of technical hires needed to build a software company.
In the traditional format, technical team members receive more equity than non-technical team members and non-technical team members receive more equity than sales team members at the same level.
Pave and Carta are solid sources for equity benchmark data to determine the spread you want to offer by role.
Level: This one's pretty simple. Higher level (aka more highly skilled) employees tend to receive more equity.
Not all roles will be eligible for stock options (e.g., non-exempt or early career employees are often excluded). And, Executives often receive a lot more equity than the average team member.
What types of grants are common to offer?
​Startups tend to offer ISOs/NSOs at earlier stages and RSUs later on.
These can be granted through new hire grants, performance grants, refresh grants (based on a set tenure), role change/promotion grants, and inversion grants.
The "traditional" vesting schedule for new hire grants is a 1 year cliff and a 4 year vest, where vesting is monthly or quarterly.
This timeline was set when Day 1 to IPO was very different, so a growing number of companies are changing their vesting terms to accommodate the market swing.
For a deeper exploration of performance, refresh, role change/promotion, and inversion grants as an ongoing equity strategy, read this Equity Refresh Program article by Carta CEO Henry Ward.
It uses really helpful graphics that explain the impact of how you choose to layer grants—either with a traditional or boxcar approach—on the total amount of equity someone is vesting at any given point in time.
How to make sure you don't run out of stock options to grant
​In many startups, responsibilities for the equity incentive program (e.g., maintaining the equity allocation table, preparing new hire grants for a Board vote, issuing grants in Carta) are split among HR, Finance, and Legal.
There's no right or wrong way to do it, but it's good to make sure you have checks and balances and QA processes across the functions.
And, someone should be modeling out the expected number of options needed based on your hiring plan and equity allocation table relative to the number available in the pool on a regular basis (e.g., quarterly before the Board or a Founder votes on new hire grants).
I know of multiple companies that have discovered that they are either out of options to grant entirely, or perilously close to being so, live in a Board meeting.
That is a bad—and completely preventable—situation. If your company does well, they will very likely have to dilute equity to create more space on the cap table at some point in time, but it should never come as a surprise.
This little thing called... taxes.
​Depending on the type of grant offered (ISO/NSO/RSU) and when an employee exercises (or purchases their stock options at the strike price of a given grant), an employee can owe tax at different points in time.
Employers usually take a stance that they can't offer financial or tax advice. That helps mitigate a lot of risk.
What you can do to help employees think ahead is offer educational resources, like this free Carta 101 course, and do trainings that cover at least basic terms and potential consequences (QSBS, long and short-term capital gains tax, AMT).
If you're in HR and don't recognize any of these terms, I'd look them up, for yourself and your ability to manage an equity incentive plan responsibly.
Closing Thoughts​
Next up, we'll be talking about how to design sales incentive plans (commissions and/or bonuses).
Until then,
Melissa
P.S. As always, this newsletter represents the opinions of one People person. It should not be construed as legal or financial advice. If you have questions about equity incentive programs, consult a qualified professional.
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