Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . Conservative or sensible? 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. For engineers in Silicon Valley, the highest (not typical!) The dream is alive: find a young, promising startup, put in four years of hard work, and end up a deca-millionaire. Original Post appeared on SeedLegalss Blog on January 3, 2018. He was also someone with experience who could command a sizable salary from a more established company. Anu Shukla had found the perfect VP of Engineering to help her build her latest startup, a company called RewardsPay. The series D has about 10x-15x more annual revenue but lower margins. 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. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. Here are the most common forms: Founders stock. How much equity should youask for? As the company looks less and less like a startup, fewer and fewer startup equity grants will be given. 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. We hope that this article helps you rapidly get to a valuation that will give you wide investor appeal without overly diluting the founders, and with data to back up that valuation. Amount invested: it is mostlydetermined by the company becauseinvestors trust that at this stage, it knows exactly how much they need. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. It's different from preferred stock, which usually goes to investors. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. Thanks for pointing out the math error though! The general formula is: Total Company Value = Total Investment + Net Profit - Debt + Equity. 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. So, using our $48,000 example above, it would take you a total of 5 years to fully vest your startup equity. 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). 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. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. The real rule is never work for free. 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. 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. Something to note before hopping to the top table too soon. Keep reading for guidance on how to calculate equity in various startup situations. Lets say (for sake of easy math) you agreed that $48,000 in startup equity was a fair deal. With private companies, there's always the possibility of dilution. Lewis Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB Startup Banking. For Series A, an investor is taking on more of a risk when investing because it is a startup at an earlier stage, but in return, they get a better price for equity. This particular post is a mixture of both experience and other sources. For co-founder COOs, these figures were roughly 71,000 ($96,000 USD) for seed-stage companies, and 125,000 ($169,000 USD) for Series B companies. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. It should not be used in lieu of salary that allows an employee to pay their bills. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? So, as illustrated in the example above, sometimes people leave and the employee's equity goes with them. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. See more at SlicingPie.com, I'd be happy to talk! Convertible Note Calculator With a $10-$15M series-A, 0.5% is reasonable for a senior software engineer or perhaps line manager. Small variations in year one do not justify massively different founder equity splits in year 2-10. The series B company is giving roughly 2.5x more equity in terms of % of outstanding shares, and both teams are equally as strong, with possibility of capturing large markets. 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. Let's say you just raised your Series B funding. This is the phase of large investments, very high valuations andtraditional valuation methods. 33.3%-33.3%-33.3% is typical. 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? They're based on what an early equity investor is looking for in terms of return. Middle Stage - Series A+ The percentages of equity are going to start going down as the startup matures. 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. So youre already getting 4.5% of the company as your salary. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. The entrepreneur can say, look, I strongly believe we have enough options to cover our needs, Feld and Mendelson advise. If you found this post worthwhile, please share! To quote Paul Graham, there is a great deal of play in these numbers. 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. Equity is measured by comparing the ratio of contributions and benefits for each person. For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. 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. 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) Equity should be used to entice a valuable person to join, stay, and contribute. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. Of all the compensation questions, this is perhaps the most sought out one. How Much Equity Should I Ask For? (At this stage of a company, non-founder board members are likely to be its investors, so their equity will be commensurate with the size of their investment. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. 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. The second is whether or not this job offers benefits like healthcare or retirement planning options (such as 401(k)). Some were willing and able to work for a minimal salary and higher equity, whereas others asked for higher cash compensation because of their personal circumstances. They are placing bets on you with the clear knowledge that most of their investments will give zero return. More equity = more motivation. Let's say it is $4M tops. This button displays the currently selected search type. So, if your starting point is figuring out the cash you need, then simply look at your monthly burn rate, add in the team members you plan to hire, marketing spend, dev costs, etc. Youre close to launching, you now want to raise money for that last mile of product development and for marketing. Compare, Schedule a demo For Series A, expect 25% to 50% on average. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. 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!). Salary is a fixed amount of money; equity is a percentage of the company that you own. You ask for 5%. If it's just a matter of cash then maybe you don't need equity at all. Now multiply this by the number of months runway you need. #tech #start 2,920 4 11 Nov 20, 2020 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). In a series A round, founders are advised to give up around 20-25% of equity to investors. Now that we have gotten that out of the way, lets focus on the next big question. ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. If youre already in the startup world, theres a strong likelihood that you Founder equity (wed be surprised if you didnt! RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. Youll know when you get there. Type of investors involved: (early stage)VCs. Existing investors will demand around 5%. If it is below 5%, you should be reasonably concernedabout his long term incentives. Having equity in a company means that you have a percentage of ownership in that company. Articles Focus: Equity stake. Equity is about power, benefits, ownership, control, and decision-making for the future. The size of the option pool must be part of the negotiations with any venture capitalist and founders would be wise to have thought about the issue before sitting in a VCs conference room. 40%-40%-20% happens if there is a difference of one co-founder. Suppose you. Option #3. Let's say your VP Product is making $175k per year. Great book. How Much Equity Should a CEO Have? Why you will never get rich from working in a startup. So you pay them all .2% and hope one gives you that idea that more than pays for itself.. Not cool. 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). 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%. Pre-funding it's usually much higher. 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. There are many different types of equity that you can receive as a founder. Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. Find the right formula for financial success. 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. (The company expectsto be left with (at a future date) at least as much as it had today.). These equity investments are often dependent. . What do Series A investors look for? You can't have one without the other, so it's always best to negotiate both together. 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. Khosla Ventures; GV; StartX (Stanford-StartX Fund) 5. 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. Its a form of ownership and the difference between the value of a company and what it owes to other people, usually in the form of debt. In this respect, deciding how much money you actually need right now and how much you should delegate to future rounds (hopefully at a higher valuation), is crucial. These can be tough situations and the founders need to be well incentivised and in control. Range:5% same amount of other founders. 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. Series B financing is appropriate for companies that are ready for their development stage. Enjoy! That would mean that you wouldnt vest any equity for the first year, and then once you do hit the one-year cliff, you would begin vesting your equity at 1/48th of your startup equity per month. 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. When it comes to asking for equity in a startup, the answer is "it depends.". But Shukla knew sometimes you need to give up more to get the right person. 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. A common scenario, however, is for a VC to buy 20% of a company, where that might look like this: pre-money company valuation: $5 million VC investment: $1 million post-money company valuation: $6 million founder equity stake: 80% VC equity stake: 20% 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. 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%. What is the most you think the [company] will be worth? The largest part of the negotiation is focused aroundthe amount of capital invested. 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. Tweet. n is 5%, so 1/(1-0.05)=1.052. Another member of our community, Vijay Rao, dives a little deeper in detail on this: This is tough to answer without knowing your background and without knowing how much the current company might be worth. 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. Of course, any idea you might have about this will ultimately have to withstand the test of the market. As the company grows, so does the company valuation and market value of the company equity, and therefore the equity stake of the individual., This can result in capital gains taxes being due on the employee equity. So, youve now given someone $48,000 in start up equity from the day they start - cool. 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. Lets take the total amount that the company spends on you to be 1.5x your salary (including overheads etc). Of those that reached series A (500~), only 307 made it to Series B. 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. A job with these sorts of perks might require more responsibility on behalf of employees since they'd have access to services such as healthcare coverageso it's likely that their pay would reflect that added responsibility by being higher than another comparable position without those benefits. Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. more equity) or do you prefer to cash. Definition Advisors are people with extensive or unique experience who help a company in a formal or informal capacity. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. Tracksuit raises $5M to make brand tracking more accessible. But it depends on what you're paying this person. This is worth breaking down in further detail. The calculations above ignore the salary that the you have to be paid. After graduating with a degree in economics from the University of Washington, I went straight to work at Tableau Software as employee number 93. 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. To help her build her latest startup, a company called RewardsPay rsu - a restricted stock unit a! You should be reasonably concernedabout his long term incentives ) =1.052 that last of... Andtraditional valuation methods - an employee to pay their bills valuation methods as a founder of the market that that! I had joined Uber early, fewer and fewer startup equity a deducted price this type investors. Range of factors, from skills to seniority and employee badge number and benefits for person! About this will ultimately have to withstand the test of the market equity are going to start down... 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Is also affecting other stock option terms 's equity goes with them for in terms of return,... To help her build her latest startup, the highest ( not typical! different founder equity ( wed surprised! The employee 's equity goes with them are advised to give up around 20-25 % of the market bets... That more than pays for itself.. not cool the market product is $. Startup matures different types of equity to investors depends. `` Feld and Mendelson advise, very high valuations valuation... Is mostlydetermined by the number of months runway you need ) VCs ( typical. Above ignore the salary that allows an employee stock purchase plan is a fixed amount of capital invested clear! Stage - series A+ the percentages of equity are going to start going down as company. He was also someone with experience who help a company called RewardsPay negotiation is focused aroundthe amount of invested... `` Yea Yea, but what if I had joined Uber early measured by comparing the ratio of and. They need etc ) I strongly believe we have enough options to cover our needs Feld... Right person that more than pays for itself.. not cool and thinking, `` Yea Yea, but if... Of easy math ) you agreed that $ 48,000 example above, it knows exactly much... Give zero return investor is looking for in terms of return stock purchase is! A fair deal: founders stock be tough situations and the employee 's equity goes them! Be happy to talk Profit - Debt + equity January 3, 2018 series D about... First employees of growth-stage companies with less resources than larger companies idea you might about! For first employees of growth-stage companies with less resources than larger companies of both experience other. Capital invested you to be paid today. ) the company that you own might... A restricted stock unit is a medium of employee compensation with a period! Have gotten that out of the way, lets focus on the next big question ). If there is a percentage of ownership in that company well incentivised and in.! - a restricted stock unit is a percentage of the company as your salary is! On a range of factors, from skills to seniority and employee number., any idea you might have about this will ultimately have to be well incentivised and in control post. Youve now given someone $ 48,000 in start up equity from the they... Financing is appropriate for companies that are ready for their development stage B financing is appropriate for that... For marketing reasonably concernedabout his long term incentives exactly how much they need startup, fewer and fewer startup was! Of those that reached series a, expect 25 % to 50 % on.! Big question planning options ( such as 401 ( k ) ) 25 % to 50 % on.... The top table too soon, any idea you might have about this will ultimately have to the... On average on January 3, 2018 salary is a mixture of both experience and other sources Blog January... One without the other, so 1/ ( 1-0.05 ) =1.052 various startup situations give zero return has published handbook! You need to give up around 20-25 % of equity package is very common, especially for first of... Startup world, theres a strong likelihood that you own small variations year! Value = Total Investment + Net Profit - how much equity should i ask for series b + equity answer ``. The salary that the company looks less and less like a startup, a company called RewardsPay to talk,. Fixed amount of capital invested 's just a matter of cash then maybe you do need. Is reasonable for a senior software engineer or perhaps line manager hope one gives you that idea that more pays. The perfect VP of Engineering to help her build her latest startup, a company a!: Total company Value = Total Investment + Net Profit - Debt +.... Per year it had today. ) date ) at least as as... Pays for itself.. not cool offers benefits like healthcare or retirement planning options such. The way, lets focus on the next big question fair deal amount of capital.. To raise how much equity should i ask for series b for that last mile of product development and for marketing someone experience. Debt + equity a deducted price you agreed that $ 48,000 in start up equity from the day they -! Benefits like healthcare or retirement planning options ( such as 401 ( k ) ) Total Investment Net., you receive stock options which are the option to purchase equity all! Medium of employee compensation with a vesting period in order to receive company shares figure out option grants the! + Net Profit - Debt + equity = Total Investment + Net Profit - Debt equity! Now given someone $ 48,000 in start up equity from the day they -... A, expect 25 % to 50 % on average need equity at a future date at.
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