A letter to founders: You have one shot to diversify your option pool

Dear Startup Founder,

You’re gearing up to hire employee number six. Hurrah!

But have you thought about employee number 60? By then, your brand-new Head of People Ops will have audited pay equity across your company. Spoiler alert: they’ll find problems.

Maybe you have great intentions. Maybe you know that companies with diverse teams outperform and want some of that for your startup. Perhaps you’re from an underrepresented group yourself. Still, it’s hard to beat averages, and in tech, “average” is pretty bad. Unfun fact: there are half as many African-Americans and 25% fewer women in tech as there are in the private sector as a whole.

You can fix salary inequity by handing out raises and promoting people.

But what about gaps in equity compensation? There… well, by employee number 60, you’re basically out of luck. By then, most of your option pool will be spoken for. To make a real dent, you and your investors would need to give away a chunk of your own stock. Can you imagine your board approving that during your equity grant agreement?

At employee number six, though, you still have a chance to build a startup with diversity of not just labor but of ownership. The road to diverse options starts by acknowledging the power of early equity. The pool of stock that you have available to grant in the early stages is much bigger than it will be in the later stages. If you grant it to people who mostly look and think alike, you’re stuck with that until you exit.

Let’s look at two startup equity compensation scenarios.

Company A

Three white men start a company. They want to do the right thing, but for the first six years of their existence, they have their heads down. They know they’re incurring cultural debt around diversity and inclusion. But debt’s just part of startups, right?

In year six, after raising a Series B round, they sink serious effort into paying down that cultural debt. And they do really well! They apply a no-excuses, metrics-driven focus to the problem. Within just two years, they go from being 10% women to 40% women & nonbinary folks; from 5% people of color to 25%.

However, despite their admirable attempt at option pool shuffling… those new employees only hold a sliver of equity ownership. The main holders of the company’s equity ownership agreement remain white and male.

Company B

Company B’s first engineer is a black woman. Thanks to her network, a few other early hires are also from underrepresented groups. But she leaves after a few years, and her network follows her. The company slowly bros up. Thanks to its founding team’s early investments in diversity, this company will retain a better-than-average cap table until it exits. But with only 15% female or nonbinary employees and 8% people of color, its line staff mix doesn’t set it up to capitalize on the benefits of that ownership diversity.

Let’s assume you don’t want to be Company A or Company B. How do you strike a balance in your startup equity compensation? The answer is simple but not easy: you pay attention. From the start.

It helps to adopt a structured approach to compensation when opting to diversify your employee option pool. When you do hire that Head of People Ops, they’ll likely recommend that you lay out a hiring plan ahead of time. You don’t need to wait for employee 60 for this. You can start now!

In this plan, you’ll track future hires’ anticipated salaries against your runway. As importantly, you’ll also plan around your equity runway: how much of your option pool you have left to give out

If you need to stretch your Series A option pool across 20 hires, how much of it can you give any one employee? It’s also helpful to validate this plan against real data. Do you want to be conservative with your runway and pay the median market rate, or do you want to attract the best by paying at the 80th percentile? Whichever comp philosophy you pick, you should know what those numbers actually are.

Let’s say a (white, male) designer you want to hire demands outsize equity for joining your company. You can push back with confidence — you know precisely how much of your option pool you need to reserve for later hires, and you know that his ask is unrealistic. Or, if he’s just that good, you can award him the equity — and step up outreach to underrepresented networks, to mitigate that award’s pay equity impact. Either way, you’re the one deciding — you’re not letting a lack of knowledge decide for you.

By knowing how your remaining option pool is tracking your approach to comp, you also put yourself in a position to offer an appropriately sized equity grant to a brilliant Latina engineer who is so used to being underpaid that she doesn’t know what to ask for.

Many companies — from six employees to 6,000 — bury this information in a maze of ad-hoc spreadsheets. But as many as 90% of those spreadsheets contain serious bugs. And most of them get confusing after a while.

Cap table management tools make it easy to monitor for underrepresentation or pay inequality on your team, and let you focus on the hard part: correcting small issues before they turn into big ones.

As with many other issues of diversity, equity and inclusion, it’s much easier to start on a path that works in your annual equity grant than it is to pay down a cultural debt later.