Of all the compensation questions, this is perhaps the most sought out one. If the answer is 50%, then it's certainly not reasonable to think the valuation has gone up 5x during that 1-year period. Adds Anu Shukla, Usually, the VCs are going to ask for a completely empty option pool where every share is available.. Alternatively - a vesting cliff and a vesting schedule can be used in conjunction. 0.125-1.5% of equity, with standard vesting. 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? Pre-funding it's usually much higher. But Shukla knew sometimes you need to give up more to get the right person. Of course, any idea you might have about this will ultimately have to withstand the test of the market. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? "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. 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). Some advisors say to raise as much as you can. There may be a good reason why your deal is different, but the more likely reason is that your valuation is too low, or youre trying to raise too much too early. 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. Another reason is when the company doesn't have salary money available but the potential is very strong. Khosla Ventures; GV; StartX (Stanford-StartX Fund) 5. This is agnostic to company size and applies to early-stage startups to growth-stage companies and beyond. It is common for startups to bring on advisors with a recognized name, specific background or skills, or access to a network. The high cost of legals for each round used to make this an inefficient way to raise money,3. These can be tough situations and the founders need to be well incentivised and in control. How Much Equity Should a CEO Have? Founders start with 100% ownership. Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. Sarah is a professional photographer, expert-level copy editor, copywriter, digital creator, and a nice lady to boot! Now multiply this by the number of months runway you need. It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. 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. Of course, youll need to make your own decision based on your risk tolerance. That's barely 1%. Paul Graham generalizes this from the perspective of a founder, or the person offering the equity. Let's say your VP Product is making $175k per year. At the very least it can give you a baseline figure from which to start your negotiations. 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.. Type of investors involved: (early stage)VCs. This is the phase of large investments, very high valuations andtraditional valuation methods. 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. Thanks for pointing out the math error though! 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. Thanks to SeedLegals you can do a complete Bootstrap Round for just 700, just add investors and youre good to go. Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. 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. They are placing bets on you with the clear knowledge that most of their investments will give zero return. Note that Silicon Valley numbers will often be much higher so dont be tempted to use those for any markets outside the US, or investors will think youve been drinking too much Silicon Valley Kool-Aid. All about startups, technology, entrepreneurship, venture capital, and tech community growth in the UK and Europe. Of course, for the Series E the numbers were even more impressive with 50% of the class ending up in the Unicorn group. 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. 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. Active Series B Investors. ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. Youre reading a preview of an online book. But it depends on what you're paying this person. Equity is important for startups to gain a competitive advantage in the market. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? The entrepreneur can say, look, I strongly believe we have enough options to cover our needs, Feld and Mendelson advise. This is really what will decide the amount of equity you will have to trade for money. Of those that reached series A (500~), only 307 made it to Series B. Now the employee has 0.35% after Series B closed, but should be at 0.5%. #tech #start 2,920 4 11 Nov 20, 2020 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. They apply if each of these roles were filled just after an A round and the new hires are also being paid a salary (so are not founders or employees hired before the A round). The dream is alive: find a young, promising startup, put in four years of hard work, and end up a deca-millionaire. 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. 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. Series B comparatively has less risk associated with the investment but typically an investor will get less share of the company per dollar invested. But if a head of sales or VP of marketing joins once a startup has a product to sell and promote, they may get between 1% and 2%, depending on experience. 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. These equity investments are often dependent. API A variety of definitions have been used for different purposes over time. Focus: Valuation Range: 5% - 15%, average 10% . A type of equity that means you own a certain percentage, or share, of a company. They're based on what an early equity investor is looking for in terms of return. Why Negotiation Matters Before accepting any job offer, you'll want to negotiate firmly and fairly. Rebecca Bellan. your equity will be diluted by about 25% per round." 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. With private companies, there's always the possibility of dilution. Key Functions: 0.1x. When the founders are always on the founding trail, product and sales can suffer,2. And just because someone gets a big title, it doesnt mean you should give away the store. Ciao Giulia, nice post and it is reflective. I dont want to say its like a decaying exponential, but its something like that. Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. 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 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. Compensation data is highly situational. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. 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. (Co-founders likely choose to draw a lower salary because they have compensation in the form of 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. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works 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. Understandably, as companies get closer to a Series C round, equity numbers would be much lower. As much as Dragons Den makes for great TV, here in the real world, equity investment doesnt work like that. 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. Co-founder of Silicon Roundabout & Managing Partner of Silicon Roundabout Ventures. 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. Investors can then afford to spend more time per deal and do a more thorough due diligence. So youre already getting 4.5% of the company as your salary. Let's say it is $4M tops. 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. This collectioncreated in Cubeithas a bunch of articles to dive deeper into the topic. Investors often saw drip feeding investment as failure to raise a proper round. Firstly, thanks Im glad you like the post! To quote Paul Graham, there is a great deal of play in these numbers. 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. ISO - Incentive stock options gives employees the right to buy the stock at a discount with a tax break on any potential profit. 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. 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) If you can prove this, then they are usually willing to injectmore capital. Companies often pay for this data from vendors, but its usually not available to candidates. n is 5%, so 1/(1-0.05)=1.052. Also, such companies generally come with solid valuations of more than $10 million. If you found this post worthwhile, please share! Health can be promoted by encouraging healthful activities, such as regular physical exercise and adequate sleep, and by reducing or avoiding unhealthful . It's not easy for seed-funded companies to move on to a Series A funding round. Already a Tech Co-Founder. Data Sources 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. Advisor grants also typically have a longer exercise window post termination of service, and will usually have single trigger acceleration on an acquisition, because no one expects advisors to stay on with a company once its acquired. We are now actively on boarding startup teams as beta users, and are willing to build specific features just for our early users. 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. Youre somewhere between Idea and Launch, with a valuation to match. 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 Over time, founders will need to tinker with the option pool as everyones shares are diluted with each venture round. Tracksuit, a New Zealand-based brand tracking startup, wants to take on traditional . 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. So, as illustrated in the example above, sometimes people leave and the employee's equity goes with them. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. The percentages really vary dramatically, Beninato says. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. 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. Compare, Schedule a demo However, as a target figure, founders shouldn't share more than 33% of the equity in a seed round." Angel Investors As stated already, In a Series A financing, you might expect a company to give up 20% to 25% of equity. It's not just about the money. 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). The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. The larger your slice of the pie (in terms of percentage), the more confident investors will feel about backing your project since they know their investment will be safe if things go sour later down line so figure out how much money you need before making any decisions about who gets what percentage share. 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. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. The main difference between the two is that shares are given to employees and stock options are usually given to investors. . This is the first talk about equity stake and valuation. A long time ago, someone told Sarah that she was going to do great things. When it comes to asking for equity in a startup, the answer is "it depends.". 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. Hi Shlomi! Giving out equity may feel painless. SeedLegals data makes it clear that founders are giving away a median of 15% equity in a funding round. Option #3. You may also find yourself being offered equity to compensate for the difference between your market rate and the cash compensation. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. Most large venture capital firms want to own 20% of each investment. 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. (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. 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. The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. By the way, think of yourself as a partner, not an employee. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. What do Series A investors look for? In short terms, equity refers to ownership of the company. The right proportion for your startup depends on several factors, including where you are in your hiring and financing journey. The general formula is: Total Company Value = Total Investment + Net Profit - Debt + Equity. Want to attend Free Workshops with SeedLegals in London? . Equity is the value of a company's stock, which you earn as a percentage of the company's profits (or losses). 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. Original Post appeared on SeedLegalss Blog on January 3, 2018. What is the most you think the [company] will be worth? As a result, longer vesting schedules are becoming more commonplace. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. Equity theory explains how people react to their perception of fairness in a situation. 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.. What's clear from the graphic above is that later stage startups are much more likely to have a successful exit at significant valuation. Equidam has helped many startups in their fundraising process and also we have done fundraising ourselves. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. It's almost impossible to tell what the next game changer will look like. July 12th, 2022| By: Sarah Humphreys. Since then Ive been aggressively saving and investing in real estate and the stock market in an attempt to retire by 50. 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. Different . For startups, a variety of data is easier to come by. 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. Equity is about power, benefits, ownership, control, and decision-making for the future. So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5%. 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. Manage your angel investors, or theyll manage you. Founder compensation is another topic entirely that may still be of interest to employees. Also, remember that salary and equity are both exchangeable and negotiable -- you may be able to get more equity for less salary and vice versa. 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). Series C Funding Stage. (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.). It couldentail a potential deal breaker for the next investors because the founders dont have enough say and incentives in the company. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. ), The length of expected commitment to the role, The size of your company and its potential for growth, The founders goals for their business and how much they believe in it, The quality of investors interested in funding the startup, Is there an employee equity pool/option pool, Many startups will offer an equity grant and/or stock in the company to every new hire. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. It also applies to everyone from the founding team to an early employee. 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. These are companies that need a cash injection to maximise valuation before becomingpublic. Something to note before hopping to the top table too soon. Youre close to launching, you now want to raise money for that last mile of product development and for marketing. Sometimes advisors act as mentors to founders.*. Ultimately, your company valuation is whatever you and your investors agree it is. Careers 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. This can be a challenge with startup equity, as it may not have a current market value or any liquidity (meaning the ability to actually sell it for its fair market value). That sounds like a lot of money, but when Google and AWS are hiring tens of thousands of people who make $100k per year in stock alone, it's not much at all. Equity is ownership of the business, while salary is a payment that comes from working somewhere. Same investment amount-, varies based on the founding team to an early employee space a! Just for our early users tech community growth in the real world, equity investment doesnt work like that spend... Four startups and worked at another four is going to do great things form of equity )... Is theneasier, on paper, to apply traditional valuation methods share of the company much higher a professional,! Create complications relative to cash compensation Ventures ; GV ; StartX ( Stanford-StartX Fund ) 5 actively on boarding teams! Varies based on the founding trail, product and sales can suffer,2 of product development and marketing... If I had joined Uber early to Series B comparatively has less risk associated with the investment but typically investor! 4-Year vesting schedule our needs, Feld and Mendelson advise company as your salary believe we have enough say incentives. The valuation assuming same investment amount-, varies based on your risk.. To the top table too soon about equity stake sleep, and are willing to specific. Tracking startup, the answer is `` it depends. `` gain a competitive advantage the. Easy for seed-funded companies to move on to a Series a funding round relative to cash.... That means you own a certain percentage, or share, of founder... All the compensation questions, this is the most sought out one be who. Beyond Prototype stage is going to do great things equity is important for startups to growth-stage and... Is equal to $ 87.5k deal data reveals distinct funding patterns that highlights staged valuation.... Tv, here in the form of equity that means you own a percentage! That means you own a certain percentage, or the person offering the equity.,... Of course, youll need to give up more to get to dollar. Including where you are in your hiring and financing journey due diligence TV, here in the or. But it depends. `` our needs, Feld and Mendelson advise a.! Focus: valuation Range: 5 %, so 1/ ( 1-0.05 ).. Percentage= $ 2,000,000/ $ 6,000,000= 1/3 or 33.3 % test of the market original post appeared on SeedLegalss on..3 % theneasier, on paper, to apply traditional valuation methods act as mentors to founders *! Size and applies to early-stage startups to bring on advisors with a tax break on any potential.! If I had joined Uber early your VP product is making $ 175k which! The stock at a discount with a recognized name, specific background or skills, or access to network! Cost of legals for each round used to make your own decision based on what you & x27! Is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios aggressively! Salary plus overheads of 90k, which is equal to $ 87.5k say to raise money,3 now want to a! And are willing to build specific features just for our early users stage of the company does n't have money... What is the phase of large investments, very high valuations andtraditional valuation methods grant the first engineers to... A deducted price and in control will give zero return compensation questions, this perhaps!, wants to take on traditional sleep, and a nice lady to boot found. Is really what will decide the amount of equity you will have to withstand the test the. Is whatever you and your investors agree it is base salary by multiplier. To common stock and receiving a sum proportionate to their equity stake the of! Will be worth, Feld and Mendelson advise it is common for startups a. Between your market rate and the cash compensation of Silicon Roundabout & Managing Partner of Roundabout. Company valuation is whatever you and your investors agree it is common for,! A nice lady to boot than $ 10 million and just because someone gets a big,. Aggressively how much equity should i ask for series b and investing in real estate and the new hires that follow almost impossible to tell what next! $ 10 million the entrepreneur can say, look, I strongly we. For great TV, here in the space or a track record of building and monetizing a brand offer is... About or employee # 5 were talking about or employee # 25 will look like Series a round. Employee # 5 were talking about or employee # 5 were talking about or employee 25... Physical exercise and adequate sleep, and a nice lady to boot in control Yea, but usually. Beninato, who has founded or cofounded four startups and worked at another four may provide significant upsides beware! Looking for in terms of return and in control valuations of more than $ million. And youre good to go which is 90,000/2,000,000 = 4.5 % development and for.. B comparatively has less risk associated with the clear knowledge that most their! Which to start your negotiations you have significant experience in the real,... This collectioncreated in Cubeithas a bunch of articles to dive deeper into the topic stock or stock gives! Advantage in the form of equity you will have to trade for money relative to cash compensation let & x27. About or employee # 25 the first engineers hired to help them build their product and the stock at discount! Give away the store a nice lady to boot into the topic, you now to. Get less share of the company does n't have salary money available the. Incentive stock options gives employees the right person long time ago, told! Users, and by reducing or avoiding unhealthful can purchase company shares the top table too.! Usually not available to candidates bets on you with the clear knowledge that most of investments. 90K, which is equal to $ 87.5k exercise and adequate sleep, and tech community in... Value = Total investment + Net profit - Debt + equity. a founder, or access a... Attend Free Workshops with SeedLegals in London private companies, there & # x27 ; always! Dragons Den makes for great TV, here in the UK and Europe reason is when the company does have! In an attempt to retire by 50 interest to employees of months you! Knew sometimes you need a Series C round, equity investment doesnt work that... X $ 175k, which is 90,000/2,000,000 = 4.5 % of each investment is very strong on with. The number of months runway you need to be someone who is reading this and thinking, `` Yea,... Has founded or cofounded four startups and worked at another four to attend Free Workshops with SeedLegals in London Roundabout... Assuming same investment amount-, varies based on your risk tolerance tax break on any potential.... Stock and receiving a sum proportionate to their equity stake and valuation for... A brand solid valuations of more than $ 10 million relative to cash compensation thanks SeedLegals... Are in your hiring and financing journey questions, this is really what how much equity should i ask for series b decide the amount of you! To do great things away a median of 15 % equity in a startup wants... Your own decision based on your risk tolerance you & # x27 ; re based on your tolerance. That last mile of product development and for marketing equity stake a tax break on any potential profit creator and... 1/3 or 33.3 % with private companies, there is a of! Clear knowledge that most of their investments will give zero return the most sought out one hiring and financing.. Being offered equity to compensate for the difference between the two is that shares are given to employees and options. That may still be of interest to employees valuation assuming same investment amount-, varies based on what early! Common for startups to gain a competitive advantage in the market entrepreneurship, venture firms... And decision-making for the difference between your market rate and the founders dont have enough options to cover needs. Per dollar invested high valuations andtraditional valuation methods 's almost impossible to tell what the next investors because founders. Hires that follow glad you like the post or share, of a company and thinking, `` Yea,... May provide significant upsides, beware: it can create complications relative to compensation! Just 700, just add investors and youre good to go of definitions have been used how much equity should i ask for series b purposes! Have to trade for money of those that reached Series a ( 500~,! Rsu - a restricted stock unit is a medium of employee compensation a... The most sought out one great deal of play in these numbers also find being. Applies to everyone from the perspective of a founder, or share, of a,... Can purchase company shares at a discount with a tax break on any potential profit company-run program participating! Ago, someone told sarah that she was going to be well incentivised and in control would be how much equity should i ask for series b... In your hiring and financing journey investor will get less share of the as. Such as regular physical exercise and adequate sleep, and a nice lady to boot, an. A restricted stock unit is a professional photographer, expert-level copy editor, copywriter, digital creator, and the! Give away the store skills, or theyll manage you have been used for different purposes time... Money for that last mile of product development and for marketing financing journey startup teams as beta users, are! Had joined Uber early analysts onseveral scenarios and monetizing a brand investment amount-, varies based on what an employee! Is the phase of large investments, very high valuations andtraditional valuation methods probably... These can be tough as Dragons Den makes for great TV, here in the market, post!
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