Equity that sells.

The situation

A venture-backed B2B software startup in Europe had just closed its Series A. The product worked and early customers were renewing. The plan for the next 18 months was simple: build a sales and marketing team that could turn a good product into a growing revenue line.

The problem was cash. The people it needed, a proven head of sales, a head of marketing and experienced account executives, already earned full market pay at established companies. Matching those salaries would have used up the round long before the team paid for itself.

We helped design and model the incentive plan. The company and every figure below have been changed and simplified, but the structure is the one we use.

The plan in one line

Pay 80% of market salary. Pay the other 20% as a bonus when KPIs are met. Grant stock options on a four-year vest with a one-year cliff. The bonus rewards this quarter. The options keep the team for years.

Step 1: Set the cash pay at 80 / 20

Every role started from what competitors pay for the same job. The guaranteed salary was 80% of it. The other 20% was paid quarterly as a bonus, in proportion to KPI results. A person who hit plan earned 100% of market in cash.

At target, the company pays the same €905,000 a year it would have paid in straight salary. The difference is that €181,000 of it is only paid when the results come in. Fixed payroll drops 20%, and the cash goes out after the revenue does.

Step 2: Pick KPIs people control

A bonus only motivates when the measures are clear, few and within the person’s control. Each role had two or three, written down before the quarter started.

• Account executives. New annual recurring revenue against quota (70%) and qualified pipeline created (30%).
• Sales engineers. Technical win rate on deals they support and the same new revenue target as their account executive, so the pod wins or loses together.
• Head of Sales. Team new revenue against plan (60%), revenue retained from existing customers (20%) and forecast accuracy (20%).
• Head of Marketing. Sales-qualified pipeline created (60%) and the cost to win each new customer against target (40%).
• Marketing manager. Qualified leads delivered and cost per lead.
• SDR. First meetings held that turn into qualified opportunities.

The bonus paid in proportion to results, up to the full 20%. Paying quarterly kept the reward close to the work.

Step 3: Size the option pool, then the sales slice

The company had 10 million fully diluted shares after the Series A and set aside a 12% pool, 1.2 million options, for every employee it planned to hire over the next 18 months. That sits in the usual range: most pools are 10% to 15% of the company, and Index Ventures benchmarks about 12% at Series A.

Options went to two groups: management and the sales teams, meaning the account executives and sales engineers who bring in the revenue. Together they received 2.70% of the company, a little over a fifth of the pool. The rest went to engineering, product and future hires. The marketing manager and the SDR were paid on the 80/20 cash plan without options.

This is where discipline matters. Salespeople already earn a big share of their pay as bonus, so their grants are usually smaller than engineers’ at the same level. Oversizing the first sales hires is one of the most common ways to run a pool dry before the company is halfway through its hiring plan.

Step 4: Set the strike at today’s fair value

The strike is the price an employee pays to turn an option into a share. It was set at the fair market value of a common share on the grant date, €0.80, based on an independent valuation. Employees only make money on growth that happens after they join. Later hires got later valuations and higher strikes, which is how it should be.

Step 5: Vest over four years, with a cliff

Nothing vests on day one. Each grant vests over four years with a one-year cliff: 25% at the first anniversary, then monthly. Someone who leaves in month 11 owns nothing. That is the market standard, and it protects the company from paying equity to people who don’t stay.

To keep the team past year four, the plan added refresh grants. Around month 30, strong performers received a smaller new grant at the then-current strike, vesting over another four years. There is always unvested equity on the table, so there is always a reason to stay.

Step 6: Write the leaver rules down

• Unvested options lapse when someone leaves and go back to the pool for the next hire.
• Vested options can be exercised within a set window after leaving. The plan was generous for good leavers and strict for anyone leaving for cause.
• Example: an account executive who leaves at month 30 keeps 9,375 vested options. The other 5,625 return to the pool.

Step 7: Sell in pods, each with its own marketing budget

Each of the four account executives was paired with a sales engineer: one owns the relationship and the close, the other owns the product demo and the technical questions. Both sit on the same 80/20 pay plan and both hold options on the same vesting schedule.

Each pod also got its own marketing budget for the year, set in the operating plan. In this example it was €50,000 per pod, for events, campaigns and content in its own market. The pod decides how to spend it and is measured on the pipeline it creates for every euro spent.

• Ownership. The pod runs its market like a small business: its own targets, its own budget and a share of the upside.
• Faster deals. Buyers get a seller and a technical expert in the same meeting, so fewer deals stall on technical questions.
• Disciplined spend. A fixed budget per pod caps marketing cost, and pipeline per euro shows which pods should get more next year.

What it could be worth

Equity only motivates if people can picture what it’s worth. So every hire saw a simple, realistic scenario. Suppose the company sells in year six for €200 million, after later funding rounds have diluted everyone by 40%. Each share is then worth about €12.00 against a strike of €0.80.

• Account executive: 15,000 options × (€12.00 − €0.80) = €168,000, plus about €48,000 from a refresh grant.
• Sales engineer: 12,500 options × €11.20 = €140,000.
• Head of Sales: 100,000 options × €11.20 = €1.12 million.
• Management and sales teams together: about €3.0 million, roughly 1.5% of the sale price.

If the company doesn’t grow past the strike price, the options expire and nobody owes anything. That is the deal: employees share in the value they help create, and only that.

Why the founders came out ahead

The founders gave up 12% of the company for the pool, and 2.70% of it for management and the sales teams. Here is why that is cheap:

• The whole pool pays for itself if it makes success just 14% more likely. Owning 88% of a bigger chance beats owning 100% of a smaller one.
• The sales slice pays for itself if it raises the odds of success by just 2.8%. A strong sales team moves the odds far more than that.
• Payroll stayed lean. €181,000 a year of team pay was only paid on results, stretching the runway from the round.

“Most founders are too greedy to see it. Giving up a little often means you are raising the probability of success.”Patrick Quigley

Accounting cost versus real cost

Founders often confuse two different costs of the same plan.

• The accounting charge. Under IFRS 2 (ASC 718 in the U.S.), the company books the grant-date fair value of the options as a non-cash expense, spread over the vesting period. For an at-the-money option that value is only a fraction of the share price. No cash leaves the company.
• Dilution. The real cost shows up at exit: the slice of the sale price that goes to employees instead of founders and investors.

The two don’t add together. They measure the same awards on different clocks. If dilution at exit is far bigger than the accounting charge ever was, that is good news: it means the company became much more valuable.

If you are in the U.S.

U.S. startups usually grant incentive stock options (ISOs) to employees and nonqualified stock options (NSOs) to others. According to the IRS, ISOs generally create no taxable income at grant or exercise (though exercise can trigger the alternative minimum tax), while NSOs are taxed as ordinary income on the gain at exercise. The strike is set by an independent 409A valuation. In Europe, tax treatment varies widely by country, so get local advice before the first grant letter goes out.

We are turning this plan into an ESOP & dilution Excel model: pay mix, pool sizing, grants, vesting and exit value by role. It is coming soon to our models page.

Lessons for any founder

1. Make 20% of sales pay variable. 80% salary, 20% bonus when KPIs are met. Top people earn full market pay, and you only pay for results.
2. Use equity for the long game. The bonus drives the quarter. Options on a four-year vest, plus refresh grants, keep people for five years or more.
3. Reserve options for management and the sales teams. The people who lead the company and the account executives and sales engineers who bring in the revenue.
4. Be generous, but disciplined. Size the pool for 12 to 18 months of hiring, and don’t blow it on your first sales hires.
5. Strike at fair value and write the rules down. Independent valuation, clear vesting, clear leaver terms.
6. Sell in pods. Pair each account executive with a sales engineer and give every pod its own yearly marketing budget.
7. Show people the numbers. An option nobody understands motivates nobody.

Benchmarks: Index Ventures, Rewarding Talent (pool sizes, sales grants, European ownership); Carta, option pools guide (10%–15% pools); Orrick (vesting); KPMG IFRS 2 handbook; IRS Topic 427.

Illustrative case study based on a real plan. The company, figures and scenario have been changed and simplified. This is not legal, tax or investment advice.