I'm looking into the equity for the 2nd employee of an early-stage startup. I've seen lots of rules of thumbs out there (some people say 1%) but it's hard to apply because some rules of thumb refer to a post-seed round company, some post series A, etc. The dilution between rounds makes these sorts of comparisons tricky.
However, I was thinking that the ratio of equity between the founders and a first employee are probably constant. For example, if the founders are splitting 20% of the company after their series A, and a first employee should get 1%, then that's a 1:20 ratio.
Does anyone have any guidance on what a reasonable ratio should be? It seems like a decent metric to use.
What the market will bear.
It will depend a lot on what skill this person is bringing to the table and how far along in the startup process you are. Like many of the people on this site I researched this topic from a CTO perspective. Here is a resource I used:
http://www.socalcto.com/2011/02/cto-equity-and-compensation-at-venture.html and the corresponding data google-doc here: https://docs.google.com/spreadsheet/ccc?key=0Am4rOhDwwPihdEloN1lla1NrVjZlQW02cDNUSFU4ZUE&hl=en#gid=0 Lets extract 1 dimension, take a look at it, and then you can see where you fit in. For startups where they have self-identified as having their "product in beta" the research suggests Founder CTO equity is about 9.6%, while non-founder CTO equity is around 1.08% giving us about a 9.5:1 ratio. Go 1 stage earlier and look at the numbers while the product is still in pre-release development and the founder equity stays about the same at 9.68% but the non-founder CTO equity obviously jumps since you have to offer less to a CTO if you have a product that is selling then you do if you're still only half way between having a product and pie-in-the-sky "visions". In this case the research suggests the ratio is closer to 5:1 for founder/non-founder early stage equity.
Here is another survey (on the parent site onstartups) http://onstartups.com/tabid/3339/bid/66/Startup-Founder-Compensation-Useful-Results-From-A-Recent-Survey.aspx So I think the answer to your question is that equity compensation for employee #1 or #2 has more to do with where the startup is in its life and what position you're hiring. The head of customer support is probably going to have less equity, even if he's employee #1, than the CTO who was hired as employee #5. Likewise the CEO that you finally realize you need to hire as employee #10 is probably going to require say 5% equity (typically options) while the sales rep you hired as #9 was a relatively small fraction of a percent. If you're an established company with an established product your employee #2 will require less equity then if you're in a beta or still in development.
It's a lot more complicated than a "rule of thumb".