How Equity Fits Into Hiring Budgets

When companies build out their hiring budgets, most line items are pretty straightforward: salaries, recruitment fees, benefits, and onboarding expenses. But one often misunderstood and undervalued element—especially in startups and growth-stage companies—is equity compensation. Understanding how equity fits into hiring budgets is not only essential for financial planning but also key to attracting and retaining top talent in today’s competitive labor market.

In this blog post, we’ll break down the role of equity in hiring budgets, explore how to factor it into compensation strategies, and provide actionable insights for HR professionals and founders alike.

Why Equity Matters in Hiring

In a world where cash flow can be tight—especially for early-stage startups—offering equity can serve as a powerful incentive. Equity gives employees ownership in the company, aligning their interests with long-term business success. When used strategically, it can reduce upfront salary costs and boost employee engagement.

For many tech companies and startups, equity is not just an add-on but a core part of the hiring budget.

Key reasons equity is critical in hiring:

• Budget Flexibility: It reduces pressure on cash compensation.
• Retention: Vesting schedules help retain employees over the long haul.
• Motivation: Equity creates a sense of ownership and accountability.
• Attraction: Top-tier candidates often expect equity in startups or innovative firms.

How to Incorporate Equity Into Hiring Budgets

To effectively include equity in your hiring budgets, companies need a well-defined strategy. Here's how you can approach it:

1. Understand Your Cap Table

Before offering equity, you need a solid understanding of your capitalization table (cap table). This shows how ownership is currently distributed and what portion is reserved for employee stock options.

Tip: Tools like Carta or Pulley help manage your cap table accurately.

2. Assign Fair Market Value (FMV)

You can’t just guess what equity is worth. You need to determine a fair market value for your company, typically via a 409A valuation (required for U.S.-based private companies). This helps you calculate how much equity translates to in dollar terms.

3. Balance Cash vs. Equity

Establish a formula to balance cash and equity. For example, if you’re offering below-market salaries, equity should make up the difference in total compensation. This is especially important when hiring key positions like CTOs or Heads of Product.

Example Compensation Package Breakdown:

4. Model Scenarios in Budget Forecasts

When planning hiring budgets, include both immediate and long-term equity costs. Use scenario modeling to understand the dilution impact and potential costs over time. Equity doesn’t hit the books like cash, but it has real value and future implications for fundraising and ownership.

5. Communicate Equity Value Clearly

Most candidates don’t understand equity fully. Part of budgeting for equity means investing time and resources in educating potential hires. Include clear explanations in offer letters and walk candidates through the details.

Common Equity Instruments and Budget Implications

Different types of equity awards have varying implications on your hiring budget:

• Stock Options: Most common in startups. No immediate cost but may impact future valuation.
• Restricted Stock Units (RSUs): Used in larger or post-IPO companies. They have clearer monetary value and may be taxed upon vesting.
• Phantom Equity: No actual ownership, but cash bonuses mimic stock value growth. Good for preserving cap table integrity.

When deciding what to include in your budget, factor in:

• Legal fees for stock plan creation
• Administrative tools and valuation services
• Employee communication and training sessions

Equity Budgeting Tips for Different Company Stages

Every company is at a different stage in its journey, and hiring budgets should reflect that.

Early-Stage Startups

• Offer more equity in place of higher salaries.
• Use broad ranges to allow negotiation flexibility.
• Emphasize future growth potential over current valuation.

Growth-Stage Companies

• Use a mix of salary and equity.
• Benchmark against competitors to stay competitive.
• Start forecasting equity pool replenishment (post-Series A/B).

Late-Stage or Public Companies

• Equity becomes more standardized (e.g., RSUs).
• More cash-heavy offers, but still include equity for alignment.
• Stock performance impacts retention and morale.

Legal and Tax Considerations

Equity compensation introduces complexity that must be accounted for when planning hiring budgets. It’s essential to collaborate with legal and tax advisors to ensure compliance and avoid future liabilities.

Here are some general best practices:

• Get regular 409A valuations.
• Clearly define vesting schedules and cliff periods.
• Educate employees about tax implications.
• Monitor dilution and update option pools as needed.

For further reading, check out the U.S. SEC’s guidance on equity compensation.

Conclusion: Equity as a Strategic Hiring Tool

Incorporating equity into your hiring budgets is not just a workaround for limited cash—it’s a strategic advantage. When thoughtfully planned and transparently communicated, equity can help you attract top talent, manage compensation efficiently, and build a team that’s invested in your company’s success.

By aligning equity strategy with your overall hiring goals, you're not only filling roles—you're building long-term value and commitment.

Call to Action

Is your team building a hiring plan? Make sure your hiring budgets include a smart equity strategy. Start by reviewing your cap table, evaluating your compensation framework, and seeking expert advice to ensure you're on the right path.

FAQ: Hiring Budgets and Equity

1. How does equity impact hiring budgets?
Equity allows companies to offer competitive compensation while conserving cash, making it a key component of strategic hiring budgets.

2. What percentage of equity should be reserved for new hires?
It varies by company stage, but typically 10–20% of total equity is allocated for an employee option pool in early-stage companies.

3. Are equity grants tax-deductible?
Not in the same way as salaries. However, certain stock option plans may offer tax benefits depending on jurisdiction and plan type.

4. How do I explain equity to candidates?
Use clear language, analogies, and personalized estimates of value. Tools like Carta’s offer letter equity calculator can help.

5. Should equity always be part of hiring budgets?
Not always, but for startups and growth companies, including equity in hiring budgets is highly recommended to stay competitive and aligned with long-term goals.