The very early (founding) team in a startup typically purchases their stock, as described earlier. At some point, for later hires, a startup typically begins awarding stock options instead of having new employees purchase their stock. Setting up a stock option plan is complicated and has to be done the right way, so it's a job for your attorney.
A common question that comes up is: for later hires, how many options are appropriate? I've seen numbers that vary quite a lot (and others might give you different numbers) but here are the ranges that I've typically seen for later (non founder) hires. In each case, I've listed not number of shares, but rather percentage ownership in the company represented by the stock options. Note that employee stock options are almost always set up to vest over time, 4 years being typical.
Typical amounts I've seen are listed below. Where someone falls in the range is typically based on level of experience and accomplishment:
- CEO: 4% to 8%
- COO: 3% to 5%
- Other Cxx positions: 2% to 3%
- VP of Engineering: 2% to 4%
- Other VPs: 1.5% to 3%
- Director positions: 0.75% to 1.5%
- Key engineering positions: 0.75% to 1.5%
Paul Grant has an essay on "The Equity Equation" that's worth reading - it's an interesting perspective.