I believe it was Sam Altman who had proposed a good solution to this, which is that you start off with a high number like that for employee #1 with decreasing numbers as the employee count goes up. If you are Instagram and become worth $1B with only 6 employees then everyone should benefit massively. On the other hand, if it takes 1000 employees to get to a great outcome, then obviously the founders and first employees will have been diluted by the addition of all the future employees required to achieve scale or an exit.

Yes, that’s a good way to go about it… Any educated opinions of what form it should take (resricted stock, rsu, options, etc.) to be most employee friendly?

That was part of the comment: at that point it's more like a co-founder not an employee. So: very few obviously.

Perhaps more reasonable is 1-2% per for the first 5-10 hires, then 0.5-1% for the next batch, etc.

Also I really think these should be RSUs, not options. Employees are already invested in the startup by paying a premium in the form of reduced salary and opportunity cost.

If you give them Restricted Stock, though, they have to pay tax on whatever the 409(a) value is -- which is what the strike price would have been with options.

You can give them a signing bonus to cover the tax, but at this point it's easier and actually better for the employee to give them the cash separately and say "you can use it to exercise if you like".

Really the difference between options and Restricted Stock is measurable in dollars, so might as well just give people the dollars.

(Note that Restricted Stock is not quite the same thing as Restricted Stock Units (RSUs)... RSUs are for later stage companies. But the principles are similar.)

Sure; point being that employees ought not have to pay for their equity, because then it's not really compensation.

Yup, all the options for granting non-founder equity are absolutely awful from an employee POV.

Maybe YC could lobby for a sane way to grant equity to early employees without penalizing the employee?