For early hires, before you think about equity make sure you understand what a good hire looks like for the role you are hiring. Go out and meet other people who have that role at other companies that your peers / friends think embody the perfect person for that role. Meet with them and ask them what you should look for in hiring someone like them. And get a sense of the personality of that type of person. Meet high performing Growth Hackers, if that is what you need (ask you friends for recommendation). Meet high performing Designers, etc.
You can find these people by tapping into your personal networks. At Alchemist, reach out to technical founders using the mailing list: hackers@alchemistaccelerator.com.
Also, Search connections database / mentors network. Find 3 all stars and invite them to be advisors and work on a short term project with the goal of possibly converting them to full time hires in 2 months or so
Once you’ve figured out what the perfect person for that role looks like, this is how you should think about equity. First, start with what you think the person's role will be sustainably in the organization. Post-Series A / B, is this a truly sustainable VP, Director, Manager, or Individual Contributor? Today, they may be a VP / C-Level exec by virtue of your size. But as you expand and hire functional experts, will they sustain in that role?
Keeping this in mind helps with ballparking. There is good data on what post-Series equity allotments are for different company roles. You can look up on the under Google Drive > Resources > Advisors/ Visas/ Hiring > Compensation Studies > A16Z Comp Data, as an example.
Start here. If you think this person is TRULY a VP level hire post Series A, you are looking at 1.5% equity POST SERIES A, with a competitive cash offer. If you think this person is TRULY a Director level hire POST Series A, you are looking at 0.75%.
Then add a premium for being pre-Series A. Typically it's around 3x the Post-Series A comp levels. So, for a VP level hire, it would 4.5% equity. For a Director, 2.25%. Why 3x? Well, with dilution alone from the Series A, you will typically dilute your equity by half (Investor dilution plus employee pool expansion). So that requires to you to double the post-Series A values. Then, add an additional multiple because of the RISK of not raising capital plus the fact that before you raise, the role will likely be more involved for that hire -- requiring them to do things that might not be asked after the company is more stable. Hence the 3x, but there is not a hard rule here.
The next factor in deciding equity is how much cash you need to pay them. The above equity positions assume a market competitive cash salary, which is generally NOT the case pre-Series A. Try to figure out what you think is legitimately market value, and what you can afford to pay them. The discount between these should be added to the equity figure as if the new hire were "investing" in the company by forgoing part of their market-competitive salary. You can get market competitive rates from the comp study. For example, a Director-level hire typically makes $170k post Series A. If you can pay $90k for the hire, that's $80K of foregone comp.
Come up with a realistic valuation for the company. I would say most pre-Series A's "realistic" valuation is $2 million. But you need to decide what is objectively right for your company at this stage. This isn't the valuation you will raise at, it's the valuation today.
In the above example, if it's $80k of foregone cash divided by $2 million valuation, that is 4% of equity (if the person were to invest that cash at this valuation). Technically, if they were to invest it would be preferred equity -- and they will be getting common equity -- but it's not needed to get into that level of detail here. The spirit of this is that there should be a premium in the equity comp for cash deferral.
In the above example -- if you were to bring on a TRUE Director-level hire and could pay them $90k -- it’s reasonable to give them 6.25% of equity, much of that is due to the cash deferral (which is significant because we are assuming you are a very early company at a $2m valuation).
*Note: All of this is subject to a 4 year vest with a 1 year cliff.
You can also use this to calibrate up / down the package by having them self select cash / equity packages. (If you need to work for this much cash, I can give you this much equity. If you want to bet more on the business and can forego cash, I can give you more equity.)