Employee equity plays an important role in enabling companies to establish the relationship with their employees which are critical to their success. As an alignment mechanism, it’s far from being perfect, but it is effective. Sadly, granting employees equity is far from being a standard part of the compensation package in many industries. But even among companies who grant equity, few do it well. Equity plans often suffer from the not-invented-here phenomena, which leads to a sub-optimal result.

To our rescue comes this great post by Andy Rachleff:

The Wealthfront Equity Plan

[Side note: The Wealthfront blog is a phenomenal resource for anyone who has equity as part of their compensation package. If that’s you – I strongly recommend familiarizing yourself with the content in this amazing resource.]

 

Here it is, in a nutshell:

1. New Hire Grant – Grant size (% of company ownership granted) calculated according to market data, factoring in: functional role, seniority level, company size and geographic location.
2. Promotion Grant – Grant size is the difference between current grant and the grant that would be given to a new hire in the new position.
3. Performance Grant – Given only to the top 10-20% performers. Grant size is 50% of current new hire grant for a person in that position.
4. Evergreen Grant – Given on an annual basis starting 2.5 years into the new hire grant. Grant size is 25% of current new hire grant for a person in that position.

Other than its market-based approach, this plan breaks away from typical equity plans in the weight and timing it places on Evergreen grants. Check out Andy’s blog post for further details and scenario examples.

I’m not advocating for implementing the Wealthfront Equity Plan as-is.  Every company is different and this should be accounted for, not ignored, in the equity plan that’s put together. But the Wealthfront plan is a great starting point based on solid reasoning and a compelling framework. A good equity plan should start with it and be refined by asking ourselves “how are we different?” rather than trying to completely reinvent the wheel from scratch.