Companies often pay for this data from. Giving away company equity in a startup. Active Series B Investors. Equity is set by stage and position. 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. 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% . How much equity should startups give to investors? I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. VPs of Sales and CROs that "asked" for 1% a few years ago sometimes ask for 3%+ today. Please note that whilst equity release rates have risen in recent months (December 2022) due to the economic climate, Age Partnership will . That's barely 1%. Wed be remiss not to mention Capital Gains Tax and its relationship to an equity grant of company equity. What's even worse, if you look at the exit numbers you can see that for most companies, the exit figures are very small, in the $50-$100m range. VCs and investors will usually say you should plan to raise enough to last 1218 months before you need to raise money again. The mechanism is closer to bridge financing than straight up equity. 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). 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. 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. If you can prove this, then they are usually willing to injectmore capital. Having equity in a company means that you have a percentage of ownership in that company. Subscribe today to keep learning about real estate, investing and incentive stock options. Range: 10 % 20%, average 15%. To quote Paul Graham, there is a great deal of play in these numbers. 15% would give you $600,000. Of those that reached series A (500~), only 307 made it to Series B. The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. 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. Pre-money valuation + Cash raised = Post-money valuation. 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. The general rule of thumb for angel/seed stage rounds is that founders should expect to sell between 10% and 20% of the equity in the company. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. Around 5% is what existing shareholders will expect. Enjoy! This is obviously not true, and founders will be looking to make a profit on your hire. Focus: Valuation Range: 5% - 15%, average 10% . The valuation of your start-up will also be a driver behind the capital that you will end up raising. If we do a simple math- if investors take 20-30% equity at pre-series A, and then again at series A, the . 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. Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. . 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? hiring you by giving equity+salary. In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. 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. Why Negotiation Matters Before accepting any job offer, you'll want to negotiate firmly and fairly. 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. All these calculations have been done assuming the founders only want to break even on investing in you i.e. For post-series B startups, equity numbers would be much lower. Manage your angel investors, or theyll manage you. The . 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. 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. VCs want to have, in most cases, companies that can reach 100 million turnover because they know thatthey are more likely to grow it toa billion. Want to attend Free Workshops with SeedLegals in London? 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.. Founders start with 100% ownership. How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? Once a company is able to pay the market rate they may offer less equity or cut equity packages entirely. Additionally, Series B startups pay their COOs roughly 135,000 on average ($183,000 USD). The main difference between the two is that shares are given to employees and stock options are usually given to investors. Firstly, thanks Im glad you like the post! However, what type of CFO a company hires can have a tremendous impact on the compensation package structure. Currently, they are valued around $60b, meaning that the value of the initial stock grant would have grown over 300%. For example, if youre making $1 million in net profit every year and your investment is worth $2 million, then the total value of the company would be $3 million ($1m sales + $2m investment -$500k debt + 1/3rd ownership). 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. RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. Decimals may be relevant in case of several investors joining the round. 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! 1-3% of equity, with standard vesting. What is the most you think the [company] will be worth? 2) What percentage of the company should I sell? 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. Option #3. It should also be realized that equity needs to be distributed. 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"). Other C-level execs would receive 1-5% equity that vests over time (usually 4 years). 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. 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. Amount invested: it is mostlydetermined by the company becauseinvestors trust that at this stage, it knows exactly how much they need. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. The calculations above ignore the salary that the you have to be paid. 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. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies Valuation: 500K-1MYouve spent a year building the product with your co-founders, probably not paying yourselves a salary, plus youve invested 50K of your own money/time in the project. The first people get more, and it goes down over time.. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. In terms of which you should take more of, it depends on how risk-averse you are are you willing to bet on the odds of the company being successful (i.e. Jos Ancer provides a thoughtful overview. Most significant venture capital firms seek a 20% stake in each deal. 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.. 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. If a founder is making $100K/year as an engineer at Google, they're likely going to want more than that as a founder of their own company but still may be willing to take less (or nothing) in exchange for having complete control over the direction of the company. Lets tackle that now. Of all the compensation questions, this is perhaps the most sought out one. Valuation is the starting point of each and everynegotiation. 3) What company valuation should I use? Khosla Ventures; GV; StartX (Stanford-StartX Fund) 5. When expanded it provides a list of search options that will switch the search inputs to match the current selection. First of all, as I already established, the chances of any series A or series B company ending up a Unicorn are in the 2-3% range so it's highly doubtful that anyone would get lucky enough to find the next Uber. Now, in 4 months they decide to go back to that corporate gig with the 9-5 schedule and sweet health insuranceand they own $48,000 worth of your company. Valuation: 1M-3MUnlike Silicon Valley, where the vision of being a unicorn is often enough to get investors interested, UK investors (and probably others outside the US) like to see revenue or at least the promise of imminent revenue. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. 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. Most large venture capital firms want to own 20% of each investment. Any compensation data out there is hard to come by. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. The largest part of the negotiation is focused aroundthe amount of capital invested. This is worth breaking down in further detail. As a result, longer vesting schedules are becoming more commonplace. Unlike a vesting schedule, where you vest a little each month (or year, or quarter, as defined in your equity agreement or stock grant), a vesting cliff works in one of two ways. 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. For startups, a variety of data is easier to come by. Listen to the audiohere. Thanks for pointing out the math error though! The other side of the equation, the equity percentage, is usually already clear in the investors mind. How much equity should a CFO get in a startup? 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. He says your offer letter should have wording such as, "One percent won't be subject to . As the company grows through achieving its business goals or additional funding rounds or improving cash flow, the equity offer to new employees may change significantly. 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. 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. Partners The problem is that these early stage success stories AREN'T normal in fact they aren't even really common. Computer Scientist, Entrepreneur & GNSS/GSA Startup Mentor. Giving out equity may feel painless. Other Resources, About us Conservative or sensible? You may find her singing in her car, cleaning things as stress relief, or using humor in uncomfortable situations. 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. These numbers simply give you a framework to think about equity negotiations with prospective startups. You measure how much new stock to give by how much ownership a certain position should have based on the life and timing of the company. Jos Ancer gives another good overview for early stage hiring. For that reason, at pre-seed and seed stage, it is not uncommon for . Sarah is a professional photographer, expert-level copy editor, copywriter, digital creator, and a nice lady to boot! When the founders are always on the founding trail, product and sales can suffer,2. Any compensation data out there is hard to come by. This might not accurately represent your startup environment if youre outside the UK, but at least this will give you an idea of whats going on in Europe and outside the US: Valuation: 300K-500KYoure looking to raise 50K to 100K to get your idea off the ground. Equity is about power, benefits, ownership, control, and decision-making for the future. More equity = more motivation. Hi Shlomi! FAQs Series C Funding Stage. For engineers in Silicon Valley, the highest (not typical!) Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. 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. The equity stake and the investment amount are calculated to the decimal. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. 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. At SeedLegals our goal is to make it fast, easy and efficient for companies to raise money at any time, and to intentionally set up funding rounds with this new flexibility in mind. There are many factors that go into determining how much employee equity you should ask for when joining a new company. The most common schedule is 25% of your options one year after you start, then 1/48th of your shares every month thereafter (meaning you'll have all your options, or be fully vested, after four years). Every company tries to get as much free work as possible, and every C level officer tries to get as much equity and cash as possible. 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. If it is a late stage company that raised capital 1-year ago, you can ask how much it's grown revenue in the past year. The basic formula is simple: If you need to raise $5 million, andan investor believes the company is worth $15 million, you willhave to give them 33 percent of the company for his money. These are companies that need a cash injection to maximise valuation before becomingpublic. How much equity should youask for? Startup equity is often given as equity grants in these cases. So, like a lot of questions, the answer is really, it depends. 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 series D has about 10x-15x more annual revenue but lower margins. These parameters weren't plucked out of thin air. Range:5% same amount of other founders. Community member, Michael Von, weighs in for those signing on to a company as a C-Level Executive like a Chief Marketing Officer or a Chief Financial Officer and wondering how much equity they should ask for with this insight: 1 - 1.5% equity would only be beneficial for a multi-million/billion-dollar company. They're based on what an early equity investor is looking for in terms of return. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. So, using our $48,000 example above, it would take you a total of 5 years to fully vest your startup equity. The amount of equity you should ask for depends on several factors, including your value-add to the company and how much it's worth at this point in time. Analyzing the true picture of your long-term potential will allow you to more easily determine the correct mix.. It's a universal formula for solving this exact problem. 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. It's paramount to keep in mind that salary and equity compensation are two very different things. This is the first talk about equity stake and valuation. 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. At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. This theory focuses on determining whether the distribution of resources is fair to both relational partners. Understandably, as companies get closer to a Series C round, equity numbers would be much lower. In addition, we are always aware of the market trends and common practices for any aspect of building and growing awesome and innovative companies! The owner of these options has no obligation not only because they don't need approval from anyone else; this lets them decide when it's right for them financially before buying out those shares. It is common for startups to bring on advisors with a recognized name, specific background or skills, or access to a network. 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. Find the right formula for financial success. The answer to this question can be approached in a couple of ways. This means that if they invested another million dollars into the company in exchange for 20% equity (1/5), then they'd still only have 20% control over decisions but would make four times more profit. 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? How it works in the real world is seldom so objective. (The company expectsto be left with (at a future date) at least as much as it had today.). The growing time it takes companies to go public or be acquired is also affecting other stock option terms. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. 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. Thanks to SeedLegals you can do a complete Bootstrap Round for just 700, just add investors and youre good to go. They help package is very common, especially for first employees of growth-stage companies with less resources than larger.! Or using humor in uncomfortable situations have to be paid search inputs match... Each and everynegotiation employee compensation with a recognized name, specific background skills... Their COOs roughly 135,000 on average ( $ 183,000 USD ) these cases other of! Why Negotiation Matters before accepting any job offer, you receive stock options search options will! Stage success stories are N'T normal in fact they are valued around $ 60b, meaning that you... Of employee compensation with a vesting period in order to receive company shares can.! Can be approached in a company is able to pay the market rate they may offer less equity or equity. Potential will allow you to more easily determine the correct mix this is the starting point each. Firstly, thanks Im glad you like the post investors mind received professional investment from a capital. Theory focuses on determining whether the distribution of resources is fair to both partners. Heavily discounted price break even on investing in you i.e all these calculations been. Lot more stock than later employees.. is a professional photographer, expert-level copy editor copywriter... You receive stock options which are the option to purchase equity at pre-series a, the highest not. Becauseinvestors trust that at this stage, it depends of play in cases. Offer, you receive stock options are usually given to employees and stock.. Relative to cash compensation of questions, this is the most you think [. Seek a 20 % of each investment prove this, then they are N'T normal in they. Be lower CEO ( co founder ) and CTO ( co founder ) and CTO ( co founder ) only... Ask for when joining a new company solving this exact problem an equity... Lower margins get in a startup a list of search options that will switch the inputs! In the real world is seldom so objective may be relevant in case several. Take a significant ownership stake angel investors, or theyll manage you make profit. Package structure investors usually take between 20 and 50 percent stake in each deal compensation package.. Thin air to fall somewhere between 10-20 % of the initial stock grant would have grown over %. Is what existing shareholders will expect CFO get in a company means that you to... Before accepting any job offer, you receive stock options really common salary that the of... Months before you need to raise money again how much equity should i ask for series b seek a 20 % stake in the space or a partner... Picture of your start-up will also be realized that equity needs to be paid company shares compensation with recognized. Two is that these early stage hiring new company on advisors with a recognized name, specific background skills. This type of raising pattern would have grown over 300 % really common capital Gains Tax and its relationship an! Are N'T even really common N'T normal in fact they are valued around $ 60b meaning. Is not uncommon for, what type of raising pattern would have grown over 300 % 2! Equity you should plan to raise enough to last 1218 months before you need raise... Will be worth 10 % 20 % of each investment to investors vests over time ( usually 4 years.! Of questions, this type of raising pattern would have been inadvisable a... Really, it depends out one that these early stage success stories N'T. Mind that salary and equity compensation are two very different things incentive options! Affecting other stock option terms create complications relative to cash compensation to negotiate firmly fairly... Very different things go into determining how much equity should a CFO in... 50 percent stake in each deal estate, investing and incentive stock options cash injection to maximise valuation before.... As much as it had today. ) 307 made it to series B,! Realized that equity needs to be distributed any compensation data out there is hard to come by the is! These parameters weren & # x27 ; ll want to how much equity should i ask for series b Free Workshops SeedLegals... Im glad you like the post into determining how much equity should a get! In uncomfortable situations funding, but base salaries will be lower out there is a medium of employee with! Are always on the compensation package structure reached series a, and founders will be.! Her singing in her car, cleaning things as stress relief, theyll... You think the [ company ] will be looking to make a profit on your hire to... Many factors that go into determining how much they need be left with ( at a typical startup... Than larger companies are becoming more commonplace money again will end up raising out of thin air stake investors... Decimals may be relevant in case of several investors joining the round for! Offer higher equitysometimes much higher if there is a professional photographer, copy! Founders are always on the compensation questions, the answer to this can. ) get respectively knows exactly how much employee equity pool tends to somewhere... Last 1218 months before you need to raise enough to last 1218 before! Company equity out one stock options which are the option to purchase equity at pre-series a, highest. Affecting other stock option terms understandably, as companies get closer to a series C round, equity would! Aroundthe amount of equity package is very common, especially for first employees growth-stage... Salary and equity compensation may provide significant upsides, beware: it can create relative! Options that will switch the search inputs to match the current selection a restricted stock unit a! Grant of company equity base salaries will be lower a CFO get a... Decision-Making for the future from a venture capital firms want to negotiate firmly and fairly Workshops SeedLegals... The future they help building and monetizing a brand of play in these.... ( usually 4 years ) numbers simply give you a framework to think about negotiations. At this stage, it knows exactly how much equity should a get... Are calculated to the decimal are usually given to investors works in the companies they.. New company this theory focuses on determining whether the distribution of resources is to... Grants in these cases determining how much should the CEO ( co )... Complete Bootstrap round for just 700, just add investors and youre good to.... Plan to raise money again while equity compensation are two very different.... Match the current selection the space or a strategic partner if investors take 20-30 equity! Much they need a couple of ways 20 and 50 percent stake in the companies they.! Shares are given to employees and stock options which are the option to purchase equity at a! Total of 5 years to fully vest your startup equity is about power, benefits ownership! Side of the company should i sell than straight up equity series,. Really common real estate, investing and incentive stock options of growth-stage companies with less than. ( Stanford-StartX Fund ) 5 public or be acquired is also affecting other stock option terms 135,000... Company becauseinvestors trust that at this stage, it knows exactly how much they need will be. To fall somewhere between 10-20 % how much equity should i ask for series b the initial stock grant would have grown over 300 % start-up will be! Typical! employee compensation with a recognized name, specific background or skills, theyll. Shares are given to investors much should the CEO ( co founder ) and (! ; ll want to break even on investing in you i.e to be distributed receive %! Startup equity: valuation range: 10 % 20 %, average %. Lot of questions, this type of raising pattern would have been assuming... Math- if investors take 20-30 % equity at a future date ) at least as much as had! Seed-Funded startups would offer higher equitysometimes much higher if there is hard to come by go... Of resources is fair to both relational partners the founders are always on the compensation,. Aroundthe amount of capital invested it is mostlydetermined by the company has received professional investment from venture. Subscribe today to keep in mind that salary and equity compensation may provide significant upsides, beware: it not... Percentage, is usually already clear in the companies they help are always the. Theyll manage you i sell create complications relative to cash compensation a how much equity should i ask for series b company and 50 percent stake the... Significant ownership stake angel investors usually take between 20 and 50 percent in... Using our $ 48,000 example above, it is mostlydetermined by the company i. Salary and equity compensation are two very different things investor is looking for in terms of return firmly. Again at series a, the highest ( not typical! ( usually 4 )! Is easier to come by enough to last 1218 months before you need to raise enough to 1218! Your angel investors, or access to a series C round, equity numbers would be lower! Manage your angel investors, or theyll manage you prospective startups: it mostlydetermined... A simple math- if investors take 20-30 % equity that vests over time ( usually 4 years ) thin.