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Many entrepreneurs struggle with determining how much equity to give people that join their team early on. This calculation is often complicated by the fact that many early employees or consultants trade cash compensation for additional equity.

While this calculation is ultimately determined by the negotiation between two parties, I find that a little back-of-the-envelope math can provide some key benchmarks. For companies on path to raise venture capital, the best available starting point for these calculations is the typical equity ownership of employees after a Series A investment. These ownership levels can be adjusted for the likely dilution of a Series A investment to get an estimate of an appropriate equity ownership level for employees engaged before the Series A. Further, since these ownership levels reflect compensation in addition to the cash compensation paid to employees, these benchmarks should probably be adjusted upward reflect foregone cash.

It is worth noting that companies which are expecting smaller exit values or differing levels of dilution should adjust the benchmark calculation accordingly.

After you have calculated benchmarks it’s important to sanity check the equity splits to be sure that the cap table is fair to everyone involved.

It is worth noting that the cap table can be changed down the road if the parties on the board or equivalent approve.