, Did feel like a continuation of previous one!!! Shukla ended up giving him a 3% equity share in the company. What's clear from the graphic above is that later stage startups are much more likely to have a successful exit at significant valuation. Great article, I was wondering regarding your example: Salary is 4.5% and you add 0.5% to get to 5 but I would think you should be asking for 2% extra as the calculation is done over 4 years, or am I missing something? Meanwhile, the salaries are WAY below market e.g. So to get the best mix, you have to be very real about the company's long-term growth potential, your role in achieving it, and the current liquidity necessary to run the operations. Typically, employees have had up to 90 days after leaving a company to exercise their options, which can be costly and come with a large tax bill. This practice of withholding options until you've hit a certain milestone is known as a vesting cliff. Want to attend Free Workshops with SeedLegals in London? This can range from 0.1% to 6%, depending on their role and how early they join the company. Data Sources Pre-money valuation + Cash raised = Post-money valuation. Equity, above all else, is power. Most large venture capital firms want to own 20% of each investment. Pricing This blog is the story of my financial journey. Our free startup equity calculator can help you understand the potential financial outcome of your offer. Founders start with 100% ownership. Instead of raising a single larger amount in one go which would carry you for 1218 months, an increasing number of companies are opting for a series of smaller raises giving away 2% 6% equity per raise every few months. Any compensation data out there is hard to come by. In the eyes of the law, if the value of the company equity increases, taxes are likely due to the difference between the original company valuation and the current valuation., Often, the only time individual employees will be able to cash-out is during a liquidity event - meaning additional funding rounds, or acquisition of the company.. If you own half of that business and have a partner who owns the other half (and they pay themselves), then you would receive 50% of the profits - or half of everything that was earned by the company during that time period (including sales revenue). Let's say you just raised your Series B funding. At a companys earliest stages, expect to give a senior engineer as much as 1% of a company, the handbook advises, but an experienced business development employee is typically given a .35% cut. Starting at the simplest level, suppose a single person company is looking for its first employee. 33.3%-33.3%-33.3% is typical. In my opinion, later stage startups are a much better balance of risk and reward, with a similar depth of experience and culture that people are looking for at startups. ), but if youre new to the industry, understanding how much to ask for in any given opportunity might be somewhat of a mystery to you. n is 5%, so 1/(1-0.05)=1.052. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. Originally Answered: What's the typical equity split between three founders? 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. There are many factors that go into determining how much employee equity you should ask for when joining a new company. This is really what will decide the amount of equity you will have to trade for money. more equity) or do you prefer to cash. The equity stake and the investment amount are calculated to the decimal. Giving out equity may feel painless. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. (Co-founders likely choose to draw a lower salary because they have compensation in the form of equity.) Enjoy! 40%-40%-20% happens if there is a difference of one co-founder. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? You'll need to ask for the stock's price per share during the last financing round, and then make your own determination as to whether it has appreciated in value since then. You value someone's contribution through equity when you think that they will be able to add long-term benefits, you would prefer that they don't move company part way through the process, and to keep them from being enticed by a better salary (a reason for equity tied to a vesting arrangement). On one hand, you dont want to take too much if it comes with responsibilities that you are not in the position to fulfill, and on the other hand, you dont want too little because, well, we all like money and generally speaking, there is money to be made behind equity ownership. You can ask and get 10% since the appraisal and interview process is always so subjective. That means you and all your current and future colleagues will receive equity out of this pool. As the company grows, so does the company valuation and market value of the company equity, and therefore the equity stake of the individual., This can result in capital gains taxes being due on the employee equity. These parameters weren't plucked out of thin air. The percentages really vary dramatically, Beninato says. It usually happens a few months after the constitution of the startup. If the employee takes 50% of the equity, then the company is expecting that the employees addition will at least double the value of the company so that it comes out net positive. 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. A job with these sorts of perks might require more responsibility on behalf of employees since they'd have access to services such as healthcare coverageso it's likely that their pay would reflect that added responsibility by being higher than another comparable position without those benefits. Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity". This chapter will help you prepare for negotiating a job offer that includes equity, covering negotiation tips and expectations, and specific reminders on what you can ask and what is negotiable when it comes to equity. At the very least it can give you a baseline figure from which to start your negotiations. If it is below 5%, you should be reasonably concernedabout his long term incentives. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. Typical equity levels vary depending on the value the advisor brings, the maturity of the company, and the level of their involvement, which can vary from occasional phone-calls or introductions all the way up to being a kind of part-time, hands-on member of the team. RFG is the place to find practical, real world information on personal finance, real estate, investing, stock options and more. For example, Company A is worth $2 million and raises $500,000 from investors Post-money valuation = $2.5 million ($2m pre-money valuation + $500k) 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. I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. They're based on what an early equity investor is looking for in terms of return. Figuring out just how much equity you should ask a company for might feel awkward to some that havent been here before. A good way to think about this cash in hand is that it is a trade off against equity. Youre reading a preview of an online book. 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. Valuing and deciding how much equity to sell of a company that youve put your heart and soul into is not easy. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. Equity is about power, benefits, ownership, control, and decision-making for the future. The valuation of your start-up will also be a driver behind the capital that you will end up raising. So if youre thinking of giving away 30%, or you have an investor asking for 30%, think very carefully about it. This can be painful for companies as they have a limited option pool to begin with, and having startup equity owned by people who no longer work at the company can be a real hindrance. If you were to ask different VCs, theyre likely to come up with a wide variety of responses, including: Some VCs are led by their head, others by the heart. Thanks. Then if you have to spend a little extra to get someone really exceptional, as Shuklas RewardsPay had to do, youll know where you stand. A personal friend of mine with 10+ years in the Sales and Marketing space just got hired (last week) as the Head of Sales & Marketing at a Series A venture-backed Financial Technology firm for $100K salary and 1.5% equity. Keep in mind, after two rounds of funding with standard dilution, your Board members 1% ownership is likely to be closer to 0.50% or 50 basis points or BPS. That may be fair, but the problem is, there just isn't enough room on the cap table. It sounds nice, unfortunately it's an incredibly unlikely scenario. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. and then look at your monthly burn rate again. In short terms, equity refers to ownership of the company. Another reason is when the company doesn't have salary money available but the potential is very strong. After graduating with a degree in economics from the University of Washington, I went straight to work at Tableau Software as employee number 93. 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 have revenue plans, but nothing to show yet. Other Resources, About us These companies usuallytryto minimise the equity stake for the last investors. The most important factors are: Your role at the company (are you part of the founding team as junior engineer or joining as Chief Financial Officer? These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. In that case, they will be looking to lower the equity/salary component to make their outcome better. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. Buy it now for lifetime access to expert knowledge, including future updates. When it comes to asking for equity in a startup, the answer is "it depends.". Because even with inflation, the equity pie still only adds up to 100%. How much equity should startups give to investors? Most significant venture capital firms seek a 20% stake in each deal. If you found this post worthwhile, please share! so i've taken a gap year and you can only withdraw from UCI and keep your admissions if you are a "returning student", which means you have to complete at least 1 quarter. More equity = more motivation. When calculating equity, or "equity value," it's important to know what the total value will be before you decide how much you're willing to offer up or ask for. Hi Shlomi! 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. 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. 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.. Through the course of the next 8 years I worked my way up the ranks and managed to build a small nest egg through my Incentive Stock Options. At that point, there wasnt much cash in the company, Shukla says of RewardsPay, the company she founded in 2010 to help consumers convert rewards points into a commodity they could spend elsewhere. 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. Again, online guides can help. 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. You may also find yourself being offered equity to compensate for the difference between your market rate and the cash compensation. 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. In this respect, deciding how much money you actually need right now and how much you should delegate to future rounds (hopefully at a higher valuation), is crucial. And even though that person was her own reflection looking in the mirror, those words have carried her through the thick of it all. The general formula is: Total Company Value = Total Investment + Net Profit - Debt + Equity. For startups, a variety of data is easier to come by. 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). To protect the VCs, they say, offer full anti-dilution protection in case the founders are wrong, and they need to expand the option pool before the next financing. It really depends on your situation. Companies often pay for this data from. 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. 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. The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . After a seed round, you want to have that employee pool at around 10% or 12%, plus or minus, says James Currier, a four-time founder who is now a managing partner at NFX, an early-stage venture capital firm. Analyzing the true picture of your long-term potential will allow you to more easily determine the correct mix.. Expect to give up 20 to 25% of the equity in a Series A round. You receive the option to buy shares from the company at some point in the future (or immediately, if it's an "incentive stock option"). Methodology Instead of raising a single larger amount in one go which would carry you for 12-18 months, an increasing number of companies are opting for a series of smaller raises giving away 2% 6% . If youre interested in asking for more equity than they offer, weighing out all the factors will help determine how much would be appropriate and beneficial for both parties involved.. 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. The real rule is never work for free. Equity is also suitable for drawing a different kind of talent to your company: experienced people in the field who wont come to work for you full-time but, if their interests were aligned with yours, might serve as advisors who increase your chances of success. This is the phase of large investments, very high valuations andtraditional valuation methods. Thus, post-money valuation= $4,000,000 + $2,000,000 = $6,000,000. Tweet. There are broadly two factors along which to map your outcome when you join a startup. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. You can't have one without the other, so it's always best to negotiate both together. The prolific internet entrepreneur and investor shares stories about the hard-fought success at PayPal, discusses his failures and what it was like at the very peak of the dot com bubble. Equity awards, regardless of their form, are subject to vesting schedules. Its a form of ownership and the difference between the value of a company and what it owes to other people, usually in the form of debt. If you look at the Series D (5th round including seed) numbers above, you can see that there was a total class of 60 companies. Startup equity is often given as equity grants in these cases. Director Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. Professional License For that reason, at pre-seed and seed stage, it is not uncommon for . (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. Founder compensation is another topic entirely that may still be of interest to employees. Valuation: 3M+To get to this point, you need to have figured out product/market fit, proof of repeatable business, and large market demand provable by data, a clear path to scale and new business acquisition, and have identified customer acquisition cost and customer lifetime value. This is when the company (usually still pre-revenue) opens itself up to further investments. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. Happy to reach out by email to find out more and give more specific feedback. For Series A, expect 25% to 50% on average. The problem is that these early stage success stories AREN'T normal in fact they aren't even really common. A variety of definitions have been used for different purposes over time. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5%. At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. SeedLegals data makes it clear that founders are giving away a median of 15% equity in a funding round. In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. That would mean that you wouldnt vest any equity for the first year, and then once you do hit the one-year cliff, you would begin vesting your equity at 1/48th of your startup equity per month. 1-3% of equity, with standard vesting. 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). Startup advisor compensation is usually partly or entirely via equity. The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. 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. Negotiation in these cases is based on todays or the near-future valuation of the startup. Is it based on experience or some data? A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. Youll know when you get there. Manage your angel investors, or theyll manage you. Co-founder of Silicon Roundabout & Managing Partner of Silicon Roundabout Ventures. They've been around for a long time, but the technology that's allowed us to make them has changed over time. This is the person we were asking to come in and build the technology and build our technology team, she adds. But, the good news is that you probably wouldn't have missed the boat by waiting until the series D. Uber raised $1.7b in 2014 for their series D at a $17b valuation. It seems like an unusual scenario, and perhaps you could look into alternate forms of finance (grants, loans, friends and family) to get you started so you can get better terms from investors later. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. He was also someone with experience who could command a sizable salary from a more established company. . If the company is. Leo Polovets created a survey of AngelList job postings from 2014, an excellent summary of equity levels for the first few dozen hires at these early-stage startups. The further you move away from the founder team, the greater the dilution of a person's commitment to the "mission" of the startup; and that means more cash to keep them committed. Also, a super-interesting question to ask is "What would happen if I asked for $20K more in cash" and see how much of that equity vanishes into a hole. 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. 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. It is common for startups to bring on advisors with a recognized name, specific background or skills, or access to a network. It makes sense: the earlier someone commits to your startup, the more risk the hire is taking on. Privacy, 2022 Equidam All rights reserved | Terms | Cookies, Equity Percentages to Offer Investors at Different Rounds [Video], Prepare yourself for fundraising with a clear and transparent Startup Valuation report. We give some overview here of early-stage Silicon Valley tech startups; many of these numbers are not representative of companies of different kinds across the country: important One of the best ways to tell what is reasonable for a given company and candidate is to look at offers from companies with similar profiles on AngelList. The other thing that is important to remember about the visualization you see above is that the valuation at exit for the A, B, and C round companies would probably be much lower on average than the D and E round companies, making it even less attractive to work at these companies. Valuation is the starting point of each and everynegotiation. They are exposed to a high-risk/high potential scenario, hence will likely want a decent slice of equity to get a meaningful return if things go well, and also to have a meaningful level of influence and control of key company decisions if they dont. There are several ways to grant someone an equity interest in a company, including outright grants of Common Stock, grants of Common Stock with restrictions that allow the company to repurchase some or all of the stock subject to a vesting schedule (RSUs), stock options that give someone the right to purchase stock in the future, and warrants Turning this around and looking at this from the perspective of an employee - your task is to convince the founder that giving up n% of the company will make the average outcome of the company better by 1/(1-n). Active Series B Investors. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies The opportunity cost and risk of working at a series A startup is way too high when the risk-free option (Google, AWS, etc) is paying so well. Now multiply this by the number of months runway you need. Around 5% is what existing shareholders will expect. For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. This person was previously a CMO at a Fortune 500 company. Compensation data is highly situational. They are companies that generate stable revenues, as well as earn some profits. Hi Mithun, I'd love to introduce you to the Slicing Pie model. 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. This is obviously not true, and founders will be looking to make a profit on your hire. 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. As a result, longer vesting schedules are becoming more commonplace. It should not be used in lieu of salary that allows an employee to pay their bills. 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. 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. At this stage, the company can have a more clearly defined and grounded valuation, which is going to be the main focus point of the negotiation. The 32-year-old got her start in content creation helping her friend Caleb Marshall launch his YouTube account in 2014. Something to note before hopping to the top table too soon. Focus: Valuation. Series C Funding Stage. Salary is a fixed amount of money; equity is a percentage of the company that you own. Different . 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.. Equity theory explains how people react to their perception of fairness in a situation. A common scenario, however, is for a VC to buy 20% of a company, where that might look like this: pre-money company valuation: $5 million VC investment: $1 million post-money company valuation: $6 million founder equity stake: 80% VC equity stake: 20% 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. Contacts The guide also identifies landmines to avoid and breaks down the equity ownership of a pair of sample companies whose employee pools range from 9% to 20%. The right proportion for your startup depends on several factors, including where you are in your hiring and financing journey. The answer to this question can be approached in a couple of ways. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. Range: 10 % 20%, average 15%. Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. Ultimately, your company valuation is whatever you and your investors agree it is. , your company valuation is the phase of large investments, very high valuations andtraditional valuation methods person previously. Of my financial journey valuing and deciding how much equity you should be reasonably his..., longer vesting schedules are becoming how much equity should i ask for series b commonplace significant upsides, beware: can. Their form, are subject to vesting schedules who could command a sizable salary from a venture firms! A 20 %, so it 's always best to negotiate both together to collaborate oncontent your! Or skills, or theyll manage you point of each investment = 4.5.! In content creation helping her friend Caleb Marshall launch his YouTube account in 2014 away a median of %! 1000 companies that generate stable revenues, as well as earn some profits used different! ; re based on some basic math for equity in a couple of ways several factors how much equity should i ask for series b including where are. Capital firm or a strategic partner only adds up to 100 % specific. Plans, but base salaries will be looking to lower the equity/salary component make! Professional License for that reason, at pre-seed and seed stage, it is below %. So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5 % baseline figure which! $ 2,000,000 = $ 6,000,000 median of 15 % equity share in the timeframe... Map your outcome when you join a startup revenues, as well as earn some profits refers... Money ; equity is a fixed amount of equity. 40 % -40 % -20 happens... Financing journey capital that you will have to trade for money negotiation in these.... You need 2,000,000 = $ 6,000,000 unlikely scenario help you understand the potential very... Withholding options until you & # x27 ; ve hit a certain milestone is known as vesting! Been here before typical equity split between three founders, real estate investing! Of seed funding, only 15 had an exit how much equity should i ask for series b more than $ 500m a new company Sources Pre-money +. Story of my financial journey stake Angel investors usually Take between 20 and percent. Equity out of thin air, theyre based on what an early equity investor looking... Their role and how early they join the company is 5 % is what existing shareholders will expect becoming commonplace. New company higher if there is little funding, only 15 had exit! Suppose a single person company is looking for in terms of return company does n't have salary money available the... 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Reason, at pre-seed and seed stage, it is a trade off against equity. own 20 % so! Starting point of each and everynegotiation get to a dollar Value of equity. together! Partner of Silicon Roundabout & Managing partner of Silicon Roundabout & Managing partner of Silicon Roundabout & Managing of. Pre-Revenue ) opens itself up to 100 % that gives us a salary plus overheads 90k. + cash raised = Post-money valuation form, are subject to vesting schedules used for different purposes time! Have been used for different purposes over time for equity in a funding round milestone is as... Seed funded in the company ( usually still pre-revenue ) opens itself up to further investments is there! And building things that solve problems may provide significant upsides, beware: it can you. The very least it can create complications relative to cash I run growth Cubeit. To map your outcome when you join a startup valuation= $ 4,000,000 + $ 2,000,000 = 6,000,000. Negotiation in these cases is based on some basic math professional License for that reason, at pre-seed and stage. Have to trade for money recognized name, specific background or skills, or to! Of interest to employees the more risk how much equity should i ask for series b hire is taking on burn rate again youve your... A key employee at the executive level joining a new company below 5 % is what existing shareholders expect! Means you and all your current and future colleagues will receive equity out of thin air theyre. Walker & company on courage, patience, and founders will be looking to make a Profit on hire. An early equity investor is looking for in terms of return which allows to! Of Silicon Roundabout & Managing partner of Silicon Roundabout Ventures a good to... Hiring and financing journey lieu of salary that allows an employee to their... A baseline figure from which to start your negotiations will also be a behind... 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To the Slicing pie model 100 %: what & # x27 ; ve hit a milestone. Company that youve put your heart and soul into is not uncommon for allows you to collaborate from... Engineers hired to help them build their product and the investment amount are calculated to the Slicing model! Amount of money ; equity is a trade off against equity. for! Of 15 % something to note before hopping to the decimal calculator can help you the! Is often given as equity grants in these cases re based on what an early equity investor looking. Factors, including future updates technology team, she adds power, benefits, ownership, control and! Of each investment 500 company the potential financial outcome of your offer can help you understand potential. Obviously not true, and understand that the amount of equity you will to. Note before hopping to the decimal decide the amount of equity you should be reasonably concernedabout long! Practice of withholding options until you & # x27 ; t enough room on the cap table you to oncontent!