The number of deals reaching this stage is relatively little. Sometimes advisors act as mentors to founders.*. The real rule is never work for free. Founders and early employees are taking a huge risk by starting their own companies; its not at all unreasonable to expect them to be willing to take less money in exchange for being able to pursue their dreams. Investors often saw drip feeding investment as failure to raise a proper round. This is a legal claim to your companys ownership, which means you have an interest in the company's assets and profits. As a rule of thumb, a non-founder CEO joining an early-stage startup (that has been running less than a year) would receive 7-10% equity. If you work for a startup that doesn't yet have much profit potential but has great potential for growth due to its mission or product line, then it would make sense for your salary to be lower than if you were working at a well-established company with high profits but little room for growth. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. VCs often sneak in additional economics for themselves by increasing the amount of the option pool on a pre-money basis, warn Brad Feld and Jason Mendelson in their book, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. Most significant venture capital firms seek a 20% stake in each deal. Startup advisor compensation is usually partly or entirely via equity. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly. Meanwhile, the salaries are WAY below market e.g. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. What an employee receives in equity, cash, and benefits depends on the role theyre filling, the sector they work in, where they and the company are located, and the possible value that specific individual may bring to the company. You'll be negotiating your equity as a percentage of the company's "Fully Diluted Capital." Fully Diluted Capital = the number of shares issued to founders ("Founder Stock") + the number of shares reserved for employees ("Employee Pool") + the number of shares issued to other investors ("preferred shares"). The first VC round makes up Series A. Let's assume that the venture capitalist puts your company's current value at $4 million (pre-money valuation) and decides to invest $2 million. The general rule of thumb for angel/seed stage rounds is that founders should sell between 10% and 20% of the equity in the company. Computer Scientist, Entrepreneur & GNSS/GSA Startup Mentor. Articles 3) What company valuation should I use? Traditionally, startups have used a four-year benchmark with a one-year cliff: no ownership until an employee has worked twelve months, and then 25% for each year worked (or an additional 1/48th for every month worked). Either way, theres no substitute for a data-driven decision, and thanks to available data showing what actually happens across a range of funding round sizes, youre now well placed to not just come up with a number, but justify it. This is more common with established companies that are generating revenue. For co-founder COOs, these figures were roughly 71,000 ($96,000 USD) for seed-stage companies, and 125,000 ($169,000 USD) for Series B companies. July 12th, 2022 | By: Sarah Humphreys your equity will be diluted by about 25% per round." Raising is incredibly hard, so understand what you need to hit your KPIs, think about what would be nice in terms of breathing space, and be realistic about the amount that would in fact place too much pressure on you in terms of deliverables and managing investor expectations. C-Level employees should generally be paid about 1015% more than managerial positions within an organization, and board members should also receive an additional 510% on top of this. First, there are many different types of companies; some are more likely to succeed than others. It usually happens a few months after the constitution of the startup. 33.3%-33.3%-33.3% is typical. The calculations above ignore the salary that the you have to be paid. How Much Equity Should I Ask For? After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. "You may have 1% now, but if the company brings in dozens of people with options, your interest will decrease because there's only 100% [to go around]," Starkman explains. Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. The series D has about 10x-15x more annual revenue but lower margins. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. A four-year vesting schedule, for example, would mean that youd get 1/48th of your total equity options each month (12 months x 4 years = 48). July 12th, 2022| By: Sarah Humphreys. After dividing initial stakes among themselves, founders use it to lure talent and compensate employees for the salary cut that they almost inevitably will take when joining a startup. Chief executive officer (CEO): 5-10% Chief operating officer (COO): 2-5% Vice president (VP): 1-2% Independent board member: 1% Director: 0.4-1.25% Lead engineer 0.5-1% Senior engineer: 0.33-0.66% Manager or junior engineer: 0.2-0.33% For post-series B startups, equity numbers would be much lower. If it's just a matter of cash then maybe you don't need equity at all. Of those companies, 10 went on to reach Unicorn status, and 7 exited before raising a Series E. This means that there was a ~28% success rate (financially) for those who joined those Series D companies. You can't have one without the other, so it's always best to negotiate both together. NSO - A non-qualified stock option is another employee stock that is simpler and more common than ISOs you pay ordinary income tax on the difference between the price when you exercise the option and the grant price.. The equity stake and the investment amount are calculated to the decimal. Our free startup equity calculator can help you understand the potential financial outcome of your offer. They are placing bets on you with the clear knowledge that most of their investments will give zero return. The Holloway Guide to Equity Compensation, for instance, is an 80-page handbook that explains arcane terms such as cliffs, claw backs, single trigger and double trigger that any entrepreneur must know to even understand what their lawyers and advisors are telling them. Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. It really depends on your situation. In this case, the negotiation is based on the valuation of the company in the future and the potential exit of the company. The 32-year-old got her start in content creation helping her friend Caleb Marshall launch his YouTube account in 2014. At that point, the option pool is coming from the founders shares and those of their earliest investor so Feld and Mendelson encourage founders to push back if they feel the VCs are asking for an unduly large option pool. Additionally, Series B startups pay their COOs roughly 135,000 on average ($183,000 USD). Valuation Report Rebecca Bellan. . A firm that I was involved in founding hired our Head of Business Development with 25+ years of experience for $100K salary plus 2.5% equity. Listen to the audiohere. A good CTO knows how to manage people and build a team, what strategy to choose for product development, and how to put efficient programming processes in place. In 2021, seven years after she first started making content, Allison Florea quit her corporate job. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. Equity can be a great form of compensation since it aligns incentives between employees and employers, and enables employees to help build long-term wealth. How much lower will depend significantly on the size of the team and the companys valuation. Convertible Note Calculator The most common - you have none of your equity for a set period of time - say, 2 years, and then you get it all at once.. The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. You have to look at each situation individually.. We are here with the help of fellow entrepreneurs in our community to share insights, guidelines, and other resources for anyone in the position to ask for (and receive) equity compensation from a company. These numbers simply give you a framework to think about equity negotiations with prospective startups. These companies usuallytryto minimise the equity stake for the last investors. As much as Dragons Den makes for great TV, here in the real world, equity investment doesnt work like that. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. Although there is no concrete rule dictating how much equity an angel investor will take in exchange for financial support, the general expectation is between 20 and 40 percent. To make a 150 page book short, he makes decamillions in 4 years off of his stock options, and witnesses technology history in the making to boot. Seed rounds - the earliest stage of funding, usually from family and angel investors - typically dilute founders' ownership by an . This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. If the company is. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. You may have to settle for less, but the [company] has to know that without a reasonable percentage, motivation would drop substantially for most startup partners. You may find her singing in her car, cleaning things as stress relief, or using humor in uncomfortable situations. Calibrating the precise size of that option pool, Currier and others say, depends on a companys hiring ambitions over the coming 12 to 18 months through a next funding cycle. would me working on bored to start up the company with a salary and an equity of 5% sounds reasonable or let me say beneficial for me . Originally Answered: What's the typical equity split between three founders? Figuring out just how much equity you should ask a company for might feel awkward to some that havent been here before. Can you imagine slaving away at a company for 5-6 years, to have it exit for $50m and have your .5%only be worth $250,000 (total, BEFORE tax). At this point, its important to remember, that although you have used the above as the calculation, funding your monthly burn isnt the message your investors want to hear. If you are an early startup employee, the only way you make (crazy) money is with an exit. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. Option #3. VPs of Sales and CROs that "asked" for 1% a few years ago sometimes ask for 3%+ today. ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. Help center The next stage of the startup funding process is Series A funding. Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. If a key hire is the third person joining a two-person team, he or she can almost be considered a co-founder and may get as much as 10% of the company. I say shoot for no less than 15%. It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. Small variations in year one do not justify massively different founder equity splits in year 2-10. 2) What percentage of the company should I sell? Yet theres also the growing recognition that building a successful company usually takes a lot longer than four years, and options are about retaining people to build something great. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. For those who joined right after the series C in 2013, just one year earlier, they would have seen a nearly 20x return (series C post-money valuation was about $4b). Range: maximum5%, since in most cases theyre going to offer quite a big part of stake on the public market (from 15 to 20, 25 %). Pricing Is this employee #5 were talking about or employee #25? asks serial entrepreneur Joe Beninato, who has founded or cofounded four startups and worked at another four. This is the phase of large investments, very high valuations andtraditional valuation methods. Comparing with the equity you were expecting earlier, you should now be asking for 0.5% more to get to the 5% ownership you were aiming for. Remember, we welcome comments, questions, and suggested topics at [email protected]. It makes sense: the earlier someone commits to your startup, the more risk the hire is taking on. Shishir Gupta from our community weighs in on how much equity to give to the "right investor": "There is no set standard, the amount of equity will depend upon the valuation and amount raised. Equidam has helped many startups in their fundraising process and also we have done fundraising ourselves. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. At this stage, you are unsure of who is going to continue the adventure with you., When Shukla was building her team at RewardsPay, she gave the earliest engineers joining her team an equity share of between .5% and 1%, depending on both experience and a persons salary requirements. So you pay them all .2% and hope one gives you that idea that more than pays for itself.. How Much Equity Should I Give Up in Series A? (Co-founders likely choose to draw a lower salary because they have compensation in the form of equity.) The Co-Founder and CEO of Care.com talks about the winding road she took from a small coconut farm in the Philippines to becoming one of a handful women CEOs leading a publicly traded company. Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. These parameters weren't plucked out of thin air. My personal favorite early startup employee story is Doug Edward's "I'm Feeling Lucky", which documents his experience as Google employee #59 (stock options and all). Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. Youre somewhere between Idea and Launch, with a valuation to match. And just because someone gets a big title, it doesnt mean you should give away the store. Wed be remiss not to mention Capital Gains Tax and its relationship to an equity grant of company equity. How much equity should startups give to investors? But note that with that valuation (and amount raised) youll have moved firmly from an angel investor to venture capital territory which comes with a great deal more investor and reporting obligations, complex fundraising terms, governance and expectations. Compare, Schedule a demo Properly parceling out equity is a challenge for first-time founders. Khosla Ventures; GV; StartX (Stanford-StartX Fund) 5. Another reason is when the company doesn't have salary money available but the potential is very strong. The answer to this question can be approached in a couple of ways. Also, such companies generally come with solid valuations of more than $10 million. After all, its an easy way to preserve your cash as you staff your startup with top-notch hires that can significantly increase your chances of success. Generally speaking, the more money a company can offer, the less they will choose to offer equity., A vesting schedule is often included when a company wants to offer employees equity. The right proportion for your startup depends on several factors, including where you are in your hiring and financing journey. With private companies, there's always the possibility of dilution. Youre reading a preview of an online book. The second is whether or not this job offers benefits like healthcare or retirement planning options (such as 401(k)). Of those that reached series A (500~), only 307 made it to Series B. There are so many stories like this that it seems normal, it seems common so common you find yourself wondering what you're doing working at any place besides a small startup. Take a look at the funnel below for more info: The most important information in this graphic is the 70% number in the bottom left hand corner. As the company looks less and less like a startup, fewer and fewer startup equity grants will be given. A type of equity that means you own a certain percentage, or share, of a company. RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. Equity compensation can be thought of as an investment: when you own equity in a company, you're putting money into its development and growth. This button displays the currently selected search type. And what about others a young startup seeks to enlist in the cause, including key advisors whose insights and connections might increase its chances of success or perhaps an outside director with the right expertise to join a nascent board of directors? Let's say it is $4M tops. As you would imagine, this isn't an exact science, but I do have some ballpark figures to guide my own judgement. Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. Lets say (for sake of easy math) you agreed that $48,000 in startup equity was a fair deal. Unfortunately, there isnt one cut and dry answer to this, as each opportunity is in itself, a unique one. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. Sarah is a professional photographer, expert-level copy editor, copywriter, digital creator, and a nice lady to boot! Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. That money would go directly into your account as profit-sharing instead of being immediately deposited into an employee checking account or paycheck like on payday at work. But Shukla knew sometimes you need to give up more to get the right person. Equity is important for startups to gain a competitive advantage in the market. Just like the equity you ask for is calculated as a % of the valuation the company, you could think of the salary paid to you and other overheads as a % of the valuation as well. Find the right formula for financial success. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? Partners For Series A, an investor is taking on more of a risk when investing because it is a startup at an earlier stage, but in return, they get a better price for equity. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies For startups, a variety of data is easier to come by. Range:5% same amount of other founders. To summarize all of this, in my opinion the best time for me to join a startup is right before they raise their Series D round. The series B company is giving roughly 2.5x more equity in terms of % of outstanding shares, and both teams are equally as strong, with possibility of capturing large markets. Understandably, as companies get closer to a Series C round, equity numbers would be much lower. So, using our $48,000 example above, it would take you a total of 5 years to fully vest your startup equity. But there's also another difference: shares can only be bought at a fixed price (in your company's stock market), whereas stock options can be bought at any time during their lifetime, meaning you could buy them now or wait until they're worth more in the future. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. How much equity is given up in Series A? Something to note before hopping to the top table too soon. Yet while complex, several online guides provide compensation benchmarks that help founders think about the size of each slice of the company they give away when recruiting talent. 3:08 PM PST February 21, 2023. Think of it as a shared Dropbox folder, but optimized for the types of content you interact with daily on your phone - Maps, contacts, links, images, notes, and much much more. Valuing and deciding how much equity to sell of a company that youve put your heart and soul into is not easy. Valuation at this stage is determined with a direct approach, these companiesusually have a track record, they have been existing for a while and they have comparables. (At this stage of a company, non-founder board members are likely to be its investors, so their equity will be commensurate with the size of their investment. The problem is you dont know which one of the five or six people youd brought in as advisors will be that person. Original Post appeared on SeedLegalss Blog on January 3, 2018. Equity is usually divided among founders, investors, employees and advisors. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. The reason for a 1218 month runway is that realistically youll need to be on the fundraising trail six months before youll have new money in the bank, and youll need to show growth between now and then to get new investors interested. Equidam Research Center In the worst case scenario for founders and employees ($2M exit with 2.0x liquidation), common stockholders with 80% ownership will receive $1 million the same amount as preferred shareholders with 20% stake. Including where you are an early startup employee, the salaries are way below e.g. If there is little funding, only 307 made it to Series B or employee # 25 3,.... You would imagine, this is more common with established companies that are revenue! Startx ( Stanford-StartX Fund ) 5 employee badge number n't an exact science, either! Make ( crazy ) money is with an exit for more than $ 500m GV StartX! Grants at the mid-level can expect.45 % versus.15 % for a few months after constitution! Using our $ 48,000 in startup equity grants will be that person, questions, and things..., has published a handbook aimed at helping entrepreneurs figure out option grants at the mid-level expect. 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