Index Ventures Launches Stock Option Calculator for Founders

The Critical Role of Stock Options for Startups

For startups, the capacity to provide stock options is fundamentally important. These options serve as a powerful incentive, attracting skilled professionals when the company is unable to compete with the substantial salaries offered by larger, more established technology companies.

Introducing OptionPlan Seed and New Compensation Research

Developing a competitive stock option plan, however, can be a complicated undertaking. To address this, London-based venture capital firm Index Ventures has launched a useful web application designed to simplify the calculation process. Alongside this, they’ve released new research detailing how startups are compensating key personnel throughout Europe and the United States.

OptionPlan Seed: A Web App for ESOP Design

OptionPlan Seed is a web-based tool specifically created for seed-stage founders who are designing Employee Stock Ownership Plans (ESOPs). The application leverages Index’s analysis of seed-stage option grants, utilizing data gathered from over 1,000 startups.

This tool encompasses a range of roles and provides benchmarks for six distinct allocation levels. It also calculates the potential financial benefits for each team member, factoring in applicable taxes. Furthermore, it adapts to the regulatory frameworks of the U.S., Canada, Israel, Australia, and 20 European nations.

This new application expands upon the existing OptionPlan for Series A companies, previously released by Index Ventures several years ago.

Key Findings on Stock Option Prevalence

Index Ventures’ research revealed that nearly all seed-stage employees are offered stock options. Specifically, 97% of technical hires and 80% of junior non-technical hires at U.S. seed-stage startups receive options.

However, the prevalence of options is lower in Europe, with 75% of technical hires and 60% of junior non-technical hires receiving them.

Trends in Stock Option Grant Sizes

The size of stock option grants is generally increasing, particularly within startups heavily focused on technology, and especially those located in the Bay Area. In sectors like e-commerce or content creation, grant sizes have remained relatively stable.

Overall, grants are larger due to the growth in seed valuations observed over the past few years.

ESOP Size Recommendations

Index Ventures has observed an increase in ESOP size at the seed stage, driven by faster hiring rates and larger grants per employee. They now recommend setting the ESOP size at 12.5% or 15%, a shift from the more traditional 10%, to effectively retain and attract talent.

Growth in Fundraise Sizes and Valuations

The research indicates that seed fundraise sizes and valuations have doubled, while overall valuations have increased by a factor of 2.5x in both Europe and the U.S.

Significant Salary Increases at Seed Stage

Salaries at the seed stage have “risen dramatically,” with average salaries increasing by more than 60%. Senior technical roles in U.S. seed-stage startups now command an average salary of $185,000, a 68% increase over three years, potentially exceeding $220,000.

In Europe, the most substantial salary increases have been observed in junior roles, encompassing both technical and non-technical positions.

The Compensation Gap Between Europe and the U.S.

Despite these increases, Index Ventures found that “Europe’s technical talent continues to have a compensation gap.” Seed-stage technical employees in Europe are, on average, still paid 40-50% less than their counterparts in the U.S.

Notably, this gap has actually widened since 2018, even as the disparity for non-technical roles has narrowed.

Salary Variations Within Europe

Index Ventures also highlighted significant salary variations across Europe, reflecting the differing costs of living in cities like London compared to more affordable locations such as Bucharest or Warsaw.

A Global Talent War

The competition for talent is now a global phenomenon, with the compensation gap for technical hires narrowing to 20-25% compared to the U.S.

Recommendations for European Seed Founders

Index Ventures concludes that “ambitious seed founders in Europe should raise the bar” regarding their hiring standards, particularly for technical roles. They should target more experienced and highly qualified candidates, supported by larger fundraises to remain competitive in terms of compensation.