Get Equity Right - Design Ownership that Attracts and Retains Talent

In the first two parts of this series, we covered how to build and operationalize your compensation strategy - from defining your philosophy and job levels to selecting the right planning tools and market data.

Now we turn to equity - a powerful tool for attracting, motivating, and retaining top talent. Yet, employees often don’t value equity fully as they don’t understand how it works. It’s complex, rarely well-explained, and easy to misunderstand.

Companies must invest in helping employees grasp what equity means, how it’s structured, and what its potential value could be to get equity right. At the same time, leaders need to understand employee expectations and proactively manage them.

You can’t assume understanding — you have to over-communicate. Ask yourself not only “What am I trying to say?” but also “How is my employee hearing this?” and “Do they actually understand it?” You’d be surprised how many people discover they need to pay to exercise their options after they leave the company 🤦‍♂️.

Building the Foundation: What Makes an Equity Program Work

Equity should be designed with the same rigor as cash compensation, with clear planning, strong communication, and disciplined management to remain competitive and sustainable.

Key Considerations for Equity Programs:

• Equity is a Finite Resource: Use it wisely. Not all employees expect or should receive equity. Eventually, you won’t be able to afford to give equity to every new hire. Start planning for that today.

• Valuation and Dilution: As you raise capital, your valuation increases, and existing equity dilutes. Plan your equity budget carefully to avoid surprises for your board and investors. 

• Vesting Schedules: Implement vesting schedules to align employee interests with long-term company success. The standard 4-year vesting schedule with a 1-year cliff works for most. We recommend not reinventing the wheel here. For retention grants, a 4-year vesting schedule with no cliff is a simple, effective approach. 

• Performance-Based Equity: Consider performance-based equity grants to reward top performers and drive results versus a tenure-based approach.

• Tax Implications: Understand the tax consequences for both the company and employees. The details matter here, and getting them wrong can erode perceived value.

• Post-Termination Exercise Period (PTEP): Most employees have only three months post-departure to exercise vested options. Depending on the strike price, that can cost thousands. Some companies extend PTEP to give employees more time, but do so cautiously — extended windows can create unexpected tax liabilities, dilution, and administrative complexity. Read more about the pros and cons of extended PTEP here. 

• Global Equity: For companies operating internationally, global equity plans bring complex tax and regulatory challenges — and non-U.S. employees may not value them as much as you expect. Be thoughtful about how and where you deploy this limited resource. 

How Equity Evolves by Stage

Your equity strategy should mature alongside your company. Each stage brings different priorities and expectations.

Before Series A, equity is your biggest lever. There's a tendency to grant way more equity than you need to, which devalues it. Be very deliberate in communicating the potential value of the equity and don’t give it away like it’s nothing. As you scale, you must manage your equity pool like you would your personal checking account. Being disciplined now will pay off as your company scales.

• Series A:

  • Everyone Is A Key Hire: It can not be understated how employees misunderstand the value of their equity. It’s critically important that you communicate to employees how their contributions can have an outsized impact on the company’s growth, since at this stage, every employee has an impact on whether you get to a Series B or not.  

  • Educate Employees: Make sure employees understand what their equity could be worth at Series B and beyond, and how their performance can directly impact that growth. 

• Series B:

  • Refined Equity Strategy: Implement a more structured equity grant process, including performance-based refresh grants. The way you talk about equity grant sizes typically transitions from communicating equity as “the % ownership of the company you have” to value-based granting based on market data (the value of what your equity could be worth down the line).

  • Financial Planning: Consider the financial implications of equity grants on the company's future funding rounds.

• Series C+:

  • Strategic Equity Management: Focus on retaining key talent and aligning their interests with the company's long-term goals.

  • Executive Compensation: Design comprehensive executive compensation packages that include equity incentives.

  • Liquidity Events: Prepare for potential liquidity events, such as IPOs, mergers and acquisitions, or internal liquidity events.

Typical Equity Grant Types

There are three main moments in the employee lifecycle when equity is typically granted:

• New Hire Grant: An initial equity grant given upon hire to an employee

  • Vesting Schedule: 1 year cliff, monthly thereafter

  • Vesting Term: 4 years

  • Handling upon termination: 3 months to exercise

• Promotion Grant: Granted after a recent promotion, as defined by a job level increase 

  • Grant Amount: The amount needed to cover the delta between the holdings in their current role and the minimum new hire guideline for the new role

  • Vesting Schedule: No cliff, monthly vesting

  • Vesting Term: 4 years

  • Handling upon termination: 3 months to exercise

• Refresh Grant: Performance-based follow-on equity grants

  • Eligibility: Top performers with 18+ months of tenure 

  • Vesting Schedule: No cliff, monthly vesting

  • Vesting Term: 4 years

  • Handling upon termination: 3 months to exercise

Retaining Talent Through Equity Refresh Programs

The purpose of an equity grant refresh is to retain top-performing employees who value equity grants and want more equity. As employees vest through their original new hire grant, the financial incentive to stay at the company decreases. Providing refresh grants can become a key retention lever. 

Best practices for refresh programs:

• Evaluate eligibility once employees are 60–80% vested.

• Tie refresh decisions to both performance and tenure.

• Typically, only the top 25% of high performers are eligible for refresh grants. Do not spread the peanut butter - not all employees should receive the same sized refresh grant.

As always, be mindful of your headcount plan and available equity budget. Design an equity refresh program that is sustainable and accounts for all new hire grants (including executives) and other grant activity that may be taking place.

Want more? Check out Carta’s Equity Refresh Calculator. 

Stock Options and RSUs: Choosing the Right Vehicle

Different equity types serve different stages of growth. Many early-stage companies start with stock options, then move toward Restricted Stock Units (RSUs) as they mature.

Let’s break down the core difference between the two:

Stock Options: The right to purchase company stock at a predetermined price (strike price) in the future.  

• Pros:

  • Potential for high upside: If the company's stock price significantly increases, the value of the options can skyrocket.  

  • Tax advantages: In some cases, taxes can be deferred as long-term capital gains if exercised and held before being sold. 

• Cons:

  • Requires upfront investment: Stock “options” are indeed giving you the option to buy them. Most employees don’t understand that to exercise options, you need to pay the strike price plus any corresponding taxes.  

  • Risk of losing money: If the stock price doesn't exceed the strike price, the options become worthless. This is especially painful if you’ve already exercised your options.

  • Complexity: Understanding and managing options can be complex.

Restricted Stock Units (RSUs): A promise to grant employees a specific number of company shares after a vesting period.  

• Pros:

  • Less risk: You receive actual shares, so there's no risk of losing money if the stock price declines.

  • Easier to understand: RSUs are generally simpler to understand and manage than options.  

• Cons:

  • Lower potential upside: The value of RSUs is directly tied to the company's stock value, so the potential for significant gains may be lower than with options.

  • Tax implications: Receiving shares can trigger immediate tax obligations.

When to Consider Each:

• Stock options are often favored by Series A-C companies due to their potential for high upside and the ability to defer taxes.

• RSUs become more common at Series D and beyond companies as they mature and the stock price becomes more stable. Granting RSUs helps the company to manage burn, as you don’t need to offer as many RSUs as options.  RSUs can be more predictable and may be preferred by less risk-tolerant employees.

Managing Equity Burn and Pool Sustainability

We find that a typical annual burn rate for equity is ~2-3%. However, if you have a down round or plan to hire key executives, burn can increase to 3-4%. Increasing your annual burn rate can create a tug-of-war between boards and companies when trying to find the right balance between retaining employees and keeping dilution at bay. 

By carefully planning and managing your equity program, you can create a powerful tool for attracting, motivating, and retaining top talent, while also driving long-term shareholder value.

Educating and Engaging Employees

Even the best equity plan loses impact if employees don’t understand it. Many people — even in tech — struggle to interpret grant paperwork or grasp how equity translates to value. Education bridges that gap.

Make equity education a continuous part of your culture, not a one-time event. Here’s how to build understanding:

• Start from onboarding. Every new hire should learn how equity works and why it matters.

• Communicate consistently. Revisit the topic during performance reviews, at company offsites, or funding milestones.

• Equip managers. Give leaders tools and talking points to explain equity clearly and confidently.

• Provide resources. Offer FAQs, visual breakdowns, or interactive calculators that show vesting over time.

When employees understand how their ownership connects to company growth, they engage differently. They can make more informed decisions and invest in your company for the long haul. Compensation consultants can be of great help here too!

The Takeaway

Equity can be a powerful motivator when executed well. It’s the promise that everyone who helps build the company shares in its success.

The most effective equity programs are simple, transparent, and sustainable. They create alignment between employees, founders, and investors — and turn ownership into a shared vision.

To get there:

1. Plan with intention. Forecast your pool, dilution, and burn annually.

2. Communicate often. Clarity builds confidence and retention.

3. Refresh strategically. Reward continued impact, not just tenure.

4. Evolve as you scale. Adjust vehicles, education, and policies as your company grows.

When equity is structured thoughtfully and explained well, it becomes more than compensation — it becomes a driving force of your culture.

A Blueprint for Success

This framework serves as a blueprint for Series A–C startups looking to build compensation programs that scale sustainably.

Ready to take your HR strategy to the next level? Let’s connect to discuss how my expertise can drive your company’s growth. 

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