Type of investors involved: later stage, growth VCs. When it comes to asking for equity in a startup, the answer is "it depends.". 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. 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. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. So if I am so smart and I have this figured out so well, when would I join a startup? Series A funding is generally much more significant than the funding procured through angel investors, with funds of more than $10 million usually being procured. 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. There are the reasons why the company raised a Series B ($10M to $20M) Let's give a final look at the number of employees by round: Growth expected to be for ~100 employees Focus: Valuation Range: 5% - 15%, average 10% . Great book. 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 . In the very early days, employees are often paid more than founders / senior executives. Whats the experience of the person coming over? There are broadly two factors along which to map your outcome when you join a startup. 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. Director Level: 0.25x. As you advance to the next funding round, you should realistically expect further dilution. 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. Of course, any idea you might have about this will ultimately have to withstand the test of the market. In business, equity refers to the amount of money each shareholder would get if all the company's assets were liquidated and debts paid off. How Much Equity Should I Ask For? Is it based on experience or some data? 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. Unfortunately, there isnt one cut and dry answer to this, as each opportunity is in itself, a unique one. Take it from our community member, Darwin Hanson, with insight on how to go about calculating how much equity to ask for: You can review averages to see that a CEO typically becomes a major shareholder in a startup, but your role and remuneration will be based on the perceived value you bring to the organization. If it is below 5%, you should be reasonably concernedabout his long term incentives. Because even with inflation, the equity pie still only adds up to 100%. Sarah is a professional photographer, expert-level copy editor, copywriter, digital creator, and a nice lady to boot! 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. For post-series B startups, equity numbers would be much lower. Eventually, founders need to think about creating an employee option pool a more disciplined way to award equity over shaving off more shares with each new hire. Pre-money valuation + Cash raised = Post-money valuation. 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). These can be tough situations and the founders need to be well incentivised and in control. At the very least it can give you a baseline figure from which to start your negotiations. 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. See more at SlicingPie.com, I'd be happy to talk! hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. 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. No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. 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. Youll know when you get there. If you found this post worthwhile, please share! Thanks for pointing out the math error though! I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. Methodology Equity is ownership of the business, while salary is a payment that comes from working somewhere. Want to attend Free Workshops with SeedLegals in London? By that point, she had founded or cofounded several venture-backed startups (shes up to five). That may be fair, but the problem is, there just isn't enough room on the cap table. Now companies are sometimes extending that period well beyond 90 days so that an employee wont end up with nothing if they leave long before they can turn their equity into cash. You have revenue plans, but nothing to show yet. 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. A couple of anecdotal examples I can give you may help out: I helped recruit a very seasoned (20+ years experience) CMO at a 4-year-old venture-backed firm for $180K base salary and 9% equity vesting over 4 years. Firstly, thanks Im glad you like the post! Once you have some revenue though, along with a plan to scale, youre on a roll. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. Ultimately, you still have to guess, but this at least gives you a ballpark estimate. Valuation is the starting point of each and everynegotiation. That's why the VC game is so tough, and why it doesnt makes sense for me to join a series A or series B startup unless I get in as a founder. 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%. There are two types of CFOs: outward-facing and inward-facing. Meanwhile, the salaries are WAY below market e.g. In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. Let's say you just raised your Series B funding. Its called a runway for a reason if you dont have lift off before you reach the end, things will come to a sudden stop! Lets take the hypothetical case of Jurassic Park Inc. again, and assume you are interviewing for the position of the CTO. Compare, Schedule a demo 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. Active Series B Investors. Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. 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. Following up from my previous post on how startup equity actually works (and clickbaitingly titled Why you will never get rich from working in a startup), this post will put together some math around how much equity you should ask for when you are joining a startup. 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. (As an example, you could say that you joining the company will make the product so good that you will increase sales by 50% in a year, and hence push the valuation higher.). Definition Advisors are people with extensive or unique experience who help a company in a formal or informal capacity. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. Founders start with 100% ownership. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. This collectioncreated in Cubeithas a bunch of articles to dive deeper into the topic. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. Expect to give up 20 to 25% of the equity in a Series A round. Every time a friend thinks of starting a new venture, I hand her/him a copy (thank you for providing the availability of a discounted multi-copy option, Mike!). 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.. Negotiation in these cases is based on todays or the near-future valuation of the startup. 3) What company valuation should I use? 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. Sometimes advisors act as mentors to founders.*. Buy it now for lifetime access to expert knowledge, including future updates. (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. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. Here are the most common forms: Founders stock. Jos Ancer provides a thoughtful overview. Thanks to SeedLegals you can do a complete Bootstrap Round for just 700, just add investors and youre good to go. Another member of our community, Vijay Rao, dives a little deeper in detail on this: This is tough to answer without knowing your background and without knowing how much the current company might be worth. Equity should be used to entice a valuable person to join, stay, and contribute. The other side of the equation, the equity percentage, is usually already clear in the investors mind. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. Founder's stock options. The largest part of the negotiation is focused aroundthe amount of capital invested. To use this calculator, you'll need the following information: Last preferred price (the last price per share for preferred stock) Post-money valuation (the company's valuation after the last round of funding) 33.3%-33.3%-33.3% is typical. 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. This is really what will decide the amount of equity you will have to trade for money. After graduating with a degree in economics from the University of Washington, I went straight to work at Tableau Software as employee number 93. RFG is the place to find practical, real world information on personal finance, real estate, investing, stock options and more. Equity is measured by comparing the ratio of contributions and benefits for each person. Originally Answered: What's the typical equity split between three founders? In this situation, you should be especially diligent in your analysis because you will realize that even the best-laid plans sometimes fall completely short. Any compensation data out there is hard to come by. Enjoy! . The 32-year-old got her start in content creation helping her friend Caleb Marshall launch his YouTube account in 2014. What is the most you think the [company] will be worth? Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. How much lower will depend significantly on the size of the team and the companys valuation. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works How it works in the real world is seldom so objective. And just because someone gets a big title, it doesnt mean you should give away the store. Remember to factor in a buffer for the unknown as anything can happen and usually does in startup land! This particular post is a mixture of both experience and other sources. 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. Obviously, it's in the Founders' best interest to retain as much ownership as possible, but investors will want to make the most of their money by acquiring large equity stakes when possible. 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. All of these lines of reasoning screw up in four fundamental ways: It takes 7 to 10 years to build a company of great value. Manage your angel investors, or theyll manage you. , Did feel like a continuation of previous one!!! We see a lot of role and title inflation going on at the seed stage, which is best avoided, warns Reshma Sohoni, co-founder and general partner at Seedcamp, a European seed fund quoted in the Index handbook. Even accounting for potentially lucrative early stock options, the statistics show that series A startups fail much more often than they succeed. Do you prefer podcasts? As much as Dragons Den makes for great TV, here in the real world, equity investment doesnt work like that. 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. 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. The problem is you dont know which one of the five or six people youd brought in as advisors will be that person. A variety of definitions have been used for different purposes over time. You also have voting rights, meaning that you get to participate in decision-making at your company (though these rights will vary depending on how much founder equity you own). (The company expectsto be left with (at a future date) at least as much as it had today.). All these calculations have been done assuming the founders only want to break even on investing in you i.e. If it's just a matter of cash then maybe you don't need equity at all. Companies often pay for this data from vendors, but its usually not available to candidates. Your Name and Contact Information (address, phone, email) Copy of EAD Card. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. These companies usuallytryto minimise the equity stake for the last investors. 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). It's not just about the money. It should not be used in lieu of salary that allows an employee to pay their bills. Original Post appeared on SeedLegalss Blog on January 3, 2018. 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. Rebecca Bellan. You can ask and get 10% since the appraisal and interview process is always so subjective. How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? That means you and all your current and future colleagues will receive equity out of this pool. 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. Any shorter than 12 months runway and its going to be hard to hit key milestones or show any real traction which means you are going to be unable to justify your next round valuation. 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. Pre-funding it's usually much higher. 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. i do have a question though what if my participation in the project is the idea itself and working on it during all the stages , yet the whole capital is from the investors. 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S say you just raised your series B funding close to launching, you should be used in lieu salary., stay, and a nice lady to boot the position of the equity stake the... Some revenue though, along with a plan to scale, youre on a roll the seed how much equity should i ask for series b equity between. Can happen and usually does in startup land, you still have to trade for money case of Park. Thewonderpodcastqs @ gmail.com if I am so smart and I have this figured out so,. Would usually be for restricted stock or stock options phone, email ) copy of EAD.! Least it can give you a ballpark estimate means you and all your current and colleagues... A variety of definitions have been inadvisable for a few reasons:1 photographer, expert-level copy,. Scale, youre on a roll for restricted stock or stock options, the salaries WAY! 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Building and monetizing a brand forms: founders stock been used for different purposes over time reasonably!
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