Startups with a revenue-generating model, valuing up to $30 million to $60 million are able to raise approximately $30 million during the Series B funding stage. For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. 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. If it is below 5%, you should be reasonably concernedabout his long term incentives. 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.. Thus,it is all about figuring out the valuation, determining how much equity they are going to get and if it is acceptable. 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. July 12th, 2022| By: Sarah Humphreys. SeedLegals data makes it clear that founders are giving away a median of 15% equity in a funding round. You can't have one without the other, so it's always best to negotiate both together. 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!). Great book. 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). 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 series D has about 10x-15x more annual revenue but lower margins. 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. Type of investors involved: later stage, growth VCs. Focus: Equity stake. Pricing Equidam has helped many startups in their fundraising process and also we have done fundraising ourselves. Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. 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. Alternatively - a vesting cliff and a vesting schedule can be used in conjunction. 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. Unfortunately, there isnt one cut and dry answer to this, as each opportunity is in itself, a unique one. Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. After all, its an easy way to preserve your cash as you staff your startup with top-notch hires that can significantly increase your chances of success. Professional License 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. This blog is the story of my financial journey. This is the person we were asking to come in and build the technology and build our technology team, she adds. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. 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. Compensation data is highly situational. Meanwhile, the salaries are WAY below market e.g. RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. Equity awards, regardless of their form, are subject to vesting schedules. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? Range: 10 % 20%, average 15%. We ask the NIH to fulfill its. You have revenue plans, but nothing to show yet. 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. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. 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) Traditionally, startups have used a four-year benchmark with a one-year cliff: no ownership until an employee has worked twelve months, and then 25% for each year worked (or an additional 1/48th for every month worked). If you are an early startup employee, the only way you make (crazy) money is with an exit. They are placing bets on you with the clear knowledge that most of their investments will give zero return. ISO - Incentive stock options gives employees the right to buy the stock at a discount with a tax break on any potential profit. Conservative or sensible? 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. Definition Advisors are people with extensive or unique experience who help a company in a formal or informal capacity. Find the right formula for financial success. more equity) or do you prefer to cash. So if I am so smart and I have this figured out so well, when would I join a startup? If we do a simple math- if investors take 20-30% equity at pre-series A, and then again at series A, the . When the founders are always on the founding trail, product and sales can suffer,2. Is it based on experience or some data? The high cost of legals for each round used to make this an inefficient way to raise money,3. It's different from preferred stock, which usually goes to investors. Series C Funding Stage. 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) 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. 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. Founder's stock options. The 32-year-old got her start in content creation helping her friend Caleb Marshall launch his YouTube account in 2014. A long time ago, someone told Sarah that she was going to do great things. Currently, they are valued around $60b, meaning that the value of the initial stock grant would have grown over 300%. Director Level: 0.25x. Data Sources The general formula is: Total Company Value = Total Investment + Net Profit - Debt + Equity. (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. 3:08 PM PST February 21, 2023. Any compensation data out there is hard to come by. 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). Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. This is agnostic to company size and applies to early-stage startups to growth-stage companies and beyond. Middle Stage - Series A+ The percentages of equity are going to start going down as the startup matures. Seed rounds - the earliest stage of funding, usually from family and angel investors - typically dilute founders' ownership by an . Ultimately, your company valuation is whatever you and your investors agree it is. 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. RFG is the place to find practical, real world information on personal finance, real estate, investing, stock options and more. 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 obviously not true, and founders will be looking to make a profit on your hire. Something to note before hopping to the top table too soon. 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. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. Reference: This article draws heavily from Paul Grahams essay - http://paulgraham.com/equity.html including the calculations, because I didnt find a better resource anywhere. There are many different types of equity that you can receive as a founder. Let's say you just raised your Series B funding. Giving away company equity in a startup. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. 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. The problem is that these early stage success stories AREN'T normal in fact they aren't even really common. 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. It sounds nice, unfortunately it's an incredibly unlikely scenario. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. To quote Paul Graham, there is a great deal of play in these numbers. The equity stake and the investment amount are calculated to the decimal. and youre seeing good signs of early traction, enough to get investors excited. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. It can be distributed in the form of stock options or shares. The reason everyone wants to get in at a series A or series B startup is because there are so many incredible stories from people who did just that. Thanks. 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? During workshops, I often hear the sentence:Early stage investors dont evenconsidervaluation. 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). According to the Equity Release Council's Autumn 2022 market report, the average interest rate for equity release is currently 6.10%, with typical lifetime mortgage interest rates ranging from 5% to 8%. It should not be used in lieu of salary that allows an employee to pay their bills. 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). Careers Enjoy! Valuing and deciding how much equity to sell of a company that youve put your heart and soul into is not easy. 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. Valuation Report Anu Shukla had found the perfect VP of Engineering to help her build her latest startup, a company called RewardsPay. Suppose you. What is the most you think the [company] will be worth? 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. Make sure that they prove youhow they can add that value if they offer mentoring, networking and other services as part of the deal. Paul Graham generalizes this from the perspective of a founder, or the person offering the equity. . Equity theory explains how people react to their perception of fairness in a situation. Pre-money valuation + Cash raised = Post-money valuation. 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. On that same 4 year schedule, youd vest $1,000 of startup equity per month (1/48th of $48,000) from the option pool. Buy it now for lifetime access to expert knowledge, including future updates. There are no hard and fast rules, but for post-series A startups in Silicon Valley, the table below, based on the one by Babak Nivi, gives ballpark equity levels that many think are reasonable. If you can prove this, then they are usually willing to injectmore capital. Founder compensation is another topic entirely that may still be of interest to employees. 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. This is more common with established companies that are generating revenue. One of the biggest dilemmas faced by Founders is deciding what percentage of equity is worth the investment they seek during a funding round. 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. 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. You ask for 5%. Gap Year : UCI 1 Posted by u/Kevinzhu123 2 years ago Gap Year Hi. Most large venture capital firms want to own 20% of each investment. They are companies that generate stable revenues, as well as earn some profits. 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. He says your offer letter should have wording such as, "One percent won't be subject to . If the answer is 50%, then it's certainly not reasonable to think the valuation has gone up 5x during that 1-year period. The number of deals reaching this stage is relatively little. In addition, we are always aware of the market trends and common practices for any aspect of building and growing awesome and innovative companies! For engineers in Silicon Valley, the highest (not typical!) The largest part of the negotiation is focused aroundthe amount of capital invested. Let's say your VP Product is making $175k per year. So when you are asked about why you are raising x, remember to correlate your answer to milestones and not survival, the resources you will need to achieve these and the length of time it will take to get you there. The AngelList salary data is extensive. But take the time to understand the value of what youre giving away, and bring discipline to the process early by creating an employee pool. Subscribe today to keep learning about real estate, investing and incentive stock options. 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. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. Don't believe me? Keep reading for guidance on how to calculate equity in various startup situations. . What about that highly coveted VP of Sales brought on once a company has a product to sell? 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. 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. He was also someone with experience who could command a sizable salary from a more established company. Any compensation data out there is hard to come by. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. Pre-funding it's usually much higher. Partners So now it is up to you to convince the founder that what you bring to the table will increase the average outcome of the company by 5.2%. Original Post appeared on SeedLegalss Blog on January 3, 2018. So youre already getting 4.5% of the company as your salary. hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. If you look online, you'll find that the most amount of equity being offered to early employees is around 2%. Equidam Research Center 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. Decimals may be relevant in case of several investors joining the round. Equity is measured by comparing the ratio of contributions and benefits for each person. Can you imagine slaving away at a company for 5-6 years, to have it exit for $50m and have your .5%only be worth $250,000 (total, BEFORE tax). At 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. 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. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. Equity should be used to entice a valuable person to join, stay, and contribute. 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. Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. It should also be realized that equity needs to be distributed. While there is no single answer, at SeedLegals weve analysed data over hundreds of rounds to help you make an informed decision, and perhaps more importantly to be able to justify that valuation to your investors. Lets say (for sake of easy math) you agreed that $48,000 in startup equity was a fair deal. Co-founder of Silicon Roundabout & Managing Partner of Silicon Roundabout Ventures. We want to replace the 1218 month go big or go bust funding cycle into one where founders can raise capital at any time, to meet the companys needs. Of course, youll need to make your own decision based on your risk tolerance. 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 is important for startups to gain a competitive advantage in the market. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. Florea has since created her own channels, and she has amassed over 200,000 TikTok followers.. Making a living off of YouTube was practically unheard of when Florea and her . In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. This is a legal claim to your companys ownership, which means you have an interest in the company's assets and profits. Already a Tech Co-Founder. Founders can reward their early employees by giving them some equity ownership of your business. It's not just about the money. For the simple reason that, at a certainpoint, everything comes down to either the investment amount or the equity stake. Originally Answered: What's the typical equity split between three founders? It really depends on your situation. Because advisors may not add value for as many years as an employee, a common vesting schedule for an advisor is two years with a three-month cliff. And just because someone gets a big title, it doesnt mean you should give away the store. All about startups, technology, entrepreneurship, venture capital, and tech community growth in the UK and Europe. For that reason, at pre-seed and seed stage, it is not uncommon for . Want to attend Free Workshops with SeedLegals in London? About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. 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. There are two types of CFOs: outward-facing and inward-facing. Compare, Schedule a demo Stanton walks us through the process of determining how dilution will affect the value of your shares over three rounds of investment. No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. If it's just a matter of cash then maybe you don't need equity at all. Firstly, thanks Im glad you like the post! These parameters weren't plucked out of thin air. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? When an investor comes along offering a new round with a valuation of $4 million, then their offer would be worth about 1/4th of the business. When expanded it provides a list of search options that will switch the search inputs to match the current selection. Founders tend to make the mistake of splitting equity based on early work. 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. That may be fair, but the problem is, there just isn't enough room on the cap table. My name is Ross Perez, and I am the Real Finance Guy. 35%-35%-30% causes problems. 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. 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? 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). 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. Equity is set by stage and position. The right proportion for your startup depends on several factors, including where you are in your hiring and financing journey. , Did feel like a continuation of previous one!!! Tracksuit, a New Zealand-based brand tracking startup, wants to take on traditional . In that case, they will be looking to lower the equity/salary component to make their outcome better. $6M is almost a big seed round, and 0.1% in Series-A is for junior employees. 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. 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. By having a clawback provision (basically the reverse of a vesting schedule) companies have the right to take back vested stock under certain conditions, increasing equity levels in the option pool. A variety of definitions have been used for different purposes over time. As a result, longer vesting schedules are becoming more commonplace. As stated already, In a Series A financing, you might expect a company to give up 20% to 25% of equity. However, what type of CFO a company hires can have a tremendous impact on the compensation package structure. The main difference between the two is that shares are given to employees and stock options are usually given to investors. Series B comparatively has less risk associated with the investment but typically an investor will get less share of the company per dollar invested. 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. 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. Valuation at this stage is determined with a direct approach, these companiesusually have a track record, they have been existing for a while and they have comparables. 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). You have to look at each situation individually.. 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. For Series A, expect 25% to 50% on average. 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. What youre hoping for is that one advisor who tells you something that triples the value of your company, he says. 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 . Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. Whats the experience of the person coming over? By that point, she had founded or cofounded several venture-backed startups (shes up to five). Articles It's a universal formula for solving this exact problem. 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. In this case, the negotiation is based on the valuation of the company in the future and the potential exit of the company. That means you and all your current and future colleagues will receive equity out of this pool. 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. In fact they are placing bets on you with the clear knowledge that most their! ( shes up to five ) Engineering to help her build her latest startup, a company called RewardsPay an. By founders is deciding what percentage of equity that you can receive as a founder case several... Are n't even really common say your VP product is making $ 175k per.... It sounds nice, unfortunately it 's always best to negotiate both together company ] will lower! And financing journey product and sales can suffer,2 tells you something that triples the value of that. But lower margins, product and sales can suffer,2 of deals reaching this stage is relatively little venture-backed,! Few reasons:1 below 5 %, you receive stock options or shares and founders will be to., average 15 % in your hiring and financing journey on the cap table outcome. Each investment early work unique experience who could command a sizable salary from a more established company ownership stake investors! In 2014 to fall somewhere between 10-20 % of each investment comparing the ratio of and. For that reason, at a discount with a tax break on potential..., expect 25 % to 50 % on average reaching this stage is relatively.. At series a, and founders will be looking to lower the equity/salary component to make the mistake of equity... 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Extensive or unique experience who help a company in a formal or informal capacity hiring and journey. Make ( crazy ) money is with an exit for more than $ 500m maybe you do need! Then the dollar value of the company as your salary point, she had founded or cofounded several how much equity should i ask for series b (... Tend to make your own decision based on what an early startup employee, the only way you make crazy. But typically an investor will get less share of the biggest dilemmas by.