Equity 101 for Private Companies: How to Structure Startup Compensation from Day One
Adapted from a Thelander “Comp Talks” lunch-and-learn with Jodie Thelander (J. Thelander Consulting) and Ally Marada, Partner in the Compensation & Benefits practice at Cooley.
Getting equity compensation right is one of the highest-leverage decisions a private company makes — and one of the easiest to get wrong. In a recent 30-minute session, compensation intelligence firm Thelander sat down with Cooley partner Ally Marada to walk through the fundamentals: how to benchmark pay, which equity awards to use at each stage, and why simplicity beats sophistication in the early innings.
Here are the key takeaways.
Benchmark Compensation by Total Financing Raised
There are many ways to slice private company compensation, but the most useful lens is total financing raised to date. It’s a cleaner proxy for a company’s stage and resources than headcount or revenue, especially in a market where capital is concentrated.
That concentration is striking. The top benchmarking category now tops out at $200M+ raised — and even that increasingly understates reality, because a smaller number of companies are raising a far larger share of available capital. The fundraising is still happening; it’s just flowing to fewer names.
Companies Are Staying Private Much Longer
The single biggest force reshaping equity strategy is timeline. Companies now go public dramatically later than they used to.
The average company going public today is around a Series F or G — deep into the alphabet. Fifteen years ago, the equivalent milestone was roughly a Series B or C. Regulators have signaled interest in helping companies access public markets earlier, but for now the runway to liquidity is long, and every extra year means more financing rounds and more dilution to plan around.
The practical implication: you have to get your mix of cash and equity right up front, because you’re managing it across a much longer road than founders faced a decade ago.
Plan for Dilution Before It Happens
Dilution isn’t a risk to avoid — it’s a certainty to plan for. Option pools have compressed from the froth of 2020–2021 (when the prevailing attitude was “grant as much as you want”) to a far more disciplined norm today, with medians in the 4.5%–5% range for life sciences companies and pool sizes that stakeholders now scrutinize closely.
A subtle but important point on options: the direction of your stock price changes the math. When a stock price is rising, newly granted options carry a higher exercise price — so employees effectively get “more” in perceived value per grant. Planning grants with that dynamic in mind, rather than reacting to it later, is part of getting it right early.
Know Your Equity Award Types
“Equity 101” really comes down to understanding a handful of instruments and when each fits:
Restricted stock is where most companies start. At formation, founders typically receive restricted stock outright. Employees can also end up holding restricted stock by early-exercising an option — exercising it before it has vested — which converts the award into restricted stock.
Incentive stock options (ISOs) carry favorable tax treatment if holding requirements are met (generally two years from grant and one year from exercise). Critically, exercising an ISO creates no income-tax withholding obligation for the company, so the employee doesn’t need extra cash to cover withholding. The catch: the spread at exercise is an adjustment item for alternative minimum tax (AMT) purposes.
Non-qualified stock options (NQSOs) do trigger withholding at exercise, meaning the employee has to come up with cash to cover the tax.
Restricted stock units (RSUs) enter the picture closer to a liquidity event — more on that below.
One practical reality: many employees who hold options never exercise them while still with the company. As long as they keep providing services, they can ride the upside without coming out of pocket.
The Shift from Options to an Options-Plus-RSU Mix
The old playbook was tidy. For technology companies, you granted early-exercisable restricted stock and options at the founder stage, then shifted to RSUs about 18–24 months before an IPO — to control dilution, sidestep exercise prices that had climbed too high, and, not incidentally, signal to recruits that an IPO was near.
For pre-commercial life sciences and biotech companies, RSUs have been less common, largely because selling shares to cover the income tax on RSUs is complicated before a company is public.
What’s emerged more recently is a blend of options and RSUs rather than diving fully into RSUs — a direct response to the longer runway to IPO. When liquidity is years away, an all-RSU approach creates problems, so companies are mixing instruments to balance dilution, tax, and retention.
Keep It Simple — Especially Early
If there’s one theme that runs through the whole conversation, it’s this: keep it simple, and get it right at the front end.
The numbers themselves are “shockingly stable,” which means there’s no need to over-engineer. A few principles:
- Default to time-based vesting. The standard four-year vest with a one-year cliff still works.
- Resist the pull toward performance-based awards early on. There’s plenty of time for that later; in the early stage, focus on building the company, not on complex award structures.
- Refresh strategically, not universally. Option pools get refreshed — often in connection with new financing — but you’re not refreshing everyone. Concentrate refresh grants on key employees, and aim to have gotten the initial grants right so you’re not constantly patching.
Don’t Forget Pay Plans Below the Executive Level
Executives get bespoke, one-off compensation decisions because they’re receiving significant cash and equity. But mid-level and junior technical staff — engineers, scientists, and other specialists — need structured pay plans, not ad hoc calls.
This has become enough of a need that Thelander now offers pay plans as a productized service, distilled from what used to be delivered only through consulting. Young companies increasingly need that structure to make consistent, defensible decisions for the bulk of their workforce.
Documentation Is Everything at Exit
A recurring source of pain in M&A is “cleanup” — a company thought it granted an equity award but, on inspection, the paperwork doesn’t hold up. In a deal context, that creates unnecessary chaos and delay.
The advice is blunt: get the documentation right the first time. A clean, correct consent can be reused again and again. And while it’s tempting to cut legal spend by leaning on AI tools to paper equity grants, the panel’s caution was direct — today’s AI tools aren’t experts at this yet, and getting equity documentation wrong is exactly the kind of mistake that surfaces at the worst possible moment, during a transaction.
The Bottom Line
The mantra throughout: get it right from the start. You know dilution is coming. You know you’ll raise significant private capital before any liquidity event. So there’s no reason not to plan for it. Equity 101 isn’t rocket science — it’s benchmarking against real data, choosing the right instruments for your stage, keeping the structure simple, and documenting everything cleanly. Mistakes made early tend to haunt you later, and you’ll have to close the gap eventually — better to close it now.