40%-40%-20% happens if there is a difference of one co-founder. Different . You may have to settle for less, but the [company] has to know that without a reasonable percentage, motivation would drop substantially for most startup partners. Enjoy! Director Level: 0.25x. How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? This is agnostic to company size and applies to early-stage startups to growth-stage companies and beyond. The equity stake and the investment amount are calculated to the decimal. Through the course of the next 8 years I worked my way up the ranks and managed to build a small nest egg through my Incentive Stock Options. 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. How much equity is given up in Series A? 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. Ultimately, your company valuation is whatever you and your investors agree it is. How much equity should a CFO get in a startup? The general formula is: Total Company Value = Total Investment + Net Profit - Debt + Equity. Of those that reached series A (500~), only 307 made it to Series B. FAQs In a series A round, founders are advised to give up around 20-25% of equity to investors. Valuation Report So youre already getting 4.5% of the company as your salary. 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). 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. Range: 10 % 20%, average 15%. And top candidates are also asking for a lot more equity. Giving away company equity in a startup. What's clear from the graphic above is that later stage startups are much more likely to have a successful exit at significant valuation. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. Some advisors say to raise as much as you can. Compensation data is highly situational. 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. 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. Exit Value. The answer to this question can be approached in a couple of ways. 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. 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. 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. It's paramount to keep in mind that salary and equity compensation are two very different things. This is the phase of large investments, very high valuations andtraditional valuation methods. Focus: Valuation Range: 5% - 15%, average 10% . These companies usuallytryto minimise the equity stake for the last investors. 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 first people get more, and it goes down over time.. This can range from 0.1% to 6%, depending on their role and how early they join the company. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. What about that highly coveted VP of Sales brought on once a company has a product to sell? The upper ranges would be for highly desired candidates with strong track records. Any compensation data out there is hard to come by. Tweet. 2) What percentage of the company should I sell? 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 about startups, technology, entrepreneurship, venture capital, and tech community growth in the UK and Europe. Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. Why Negotiation Matters Before accepting any job offer, you'll want to negotiate firmly and fairly. Equity is the value of a company's stock, which you earn as a percentage of the companys profits (or losses). Currently, they are valued around $60b, meaning that the value of the initial stock grant would have grown over 300%. Equity is usually divided among founders, investors, employees and advisors. Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. This is obviously not true, and founders will be looking to make a profit on your hire. Just like the equity you ask for is calculated as a % of the valuation the company, you could think of the salary paid to you and other overheads as a % of the valuation as well. 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. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. 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. The entrepreneur can say, look, I strongly believe we have enough options to cover our needs, Feld and Mendelson advise. (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. By that point, she had founded or cofounded several venture-backed startups (shes up to five). Suppose you. After a seed round, you want to have that employee pool at around 10% or 12%, plus or minus, says James Currier, a four-time founder who is now a managing partner at NFX, an early-stage venture capital firm. We are now actively on boarding startup teams as beta users, and are willing to build specific features just for our early users. 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. 3) What company valuation should I use? For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. Shukla ended up giving him a 3% equity share in 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). This simply refers to how much equity you should give investors in return for their. The further you move away from the founder team, the greater the dilution of a person's commitment to the "mission" of the startup; and that means more cash to keep them committed. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? Following up from my previous post on how startup equity actually works (and clickbaitingly titled Why you will never get rich from working in a startup), this post will put together some math around how much equity you should ask for when you are joining a startup. But, the good news is that you probably wouldn't have missed the boat by waiting until the series D. Uber raised $1.7b in 2014 for their series D at a $17b valuation. So you pay them all .2% and hope one gives you that idea that more than pays for itself.. 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. Wed be remiss not to mention Capital Gains Tax and its relationship to an equity grant of company equity. Founders tend to make the mistake of splitting equity based on early work. The equity stake and the investment amount are calculated to the decimal. 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! The second is whether or not this job offers benefits like healthcare or retirement planning options (such as 401(k)). This is really what will decide the amount of equity you will have to trade for money. Thanks. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. 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%. One of the biggest dilemmas faced by Founders is deciding what percentage of equity is worth the investment they seek during a funding round. 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. Want to attend Free Workshops with SeedLegals in London? 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. 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. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. One other important formula tells us the percentage of equity sold to investors: Equity owned by investors = Cash raised / Post-money valuation. How much lower will depend significantly on the size of the team and the companys valuation. Because even with inflation, the equity pie still only adds up to 100%. Of course, any idea you might have about this will ultimately have to withstand the test of the market. With a $10-$15M series-A, 0.5% is reasonable for a senior software engineer or perhaps line manager. 35%-35%-30% causes problems. And just because someone gets a big title, it doesnt mean you should give away the store. There are so many stories like this that it seems normal, it seems common so common you find yourself wondering what you're doing working at any place besides a small startup. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. If the company is. hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. Startup advisor compensation is usually partly or entirely via equity. Of those that reached series A (500~), only 307 made it to Series B. Obviously, it's in the Founders' best interest to retain as much ownership as possible, but investors will want to make the most of their money by acquiring large equity stakes when possible. Equity 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. A personal friend of mine with 10+ years in the Sales and Marketing space just got hired (last week) as the Head of Sales & Marketing at a Series A venture-backed Financial Technology firm for $100K salary and 1.5% equity. 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. 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. Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. It should also be realized that equity needs to be distributed. 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? Is it based on experience or some data? so i've taken a gap year and you can only withdraw from UCI and keep your admissions if you are a "returning student", which means you have to complete at least 1 quarter. 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. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. To quote Paul Graham, there is a great deal of play in these numbers. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. However, as a target figure, founders shouldn't share more than 33% of the equity in a seed round." Angel Investors In this case, you shouldnt even talk about valuation: focus on the incentives each personshould have in working towardsan exit. Something to note before hopping to the top table too soon. Range: maximum5%, since in most cases theyre going to offer quite a big part of stake on the public market (from 15 to 20, 25 %). 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. 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). In the worst case scenario for founders and employees ($2M exit with 2.0x liquidation), common stockholders with 80% ownership will receive $1 million the same amount as preferred shareholders with 20% stake. All three questions are mathematically intertwined, so there are two approaches you can take:a) Decide how much money you want to raise, and go forward from there; orb) Start with how much of your company you want to sell, and work backwards. If you're giving a full salary, then less equity is fine. 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. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. 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. Type of investors involved: later stage, growth VCs. 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. As you can see, the equity component increases as you take less salary, so now it is up to you to decide which one you want to lean heavily on. Buy it now for lifetime access to expert knowledge, including future updates. Don't believe me? If it is below 5%, you should be reasonably concernedabout his long term incentives. It sounds nice, unfortunately it's an incredibly unlikely scenario. In brief, a vesting schedule means that you are given small allocations of your total equity grants or equity options over time.. . Preferred stock means you get a certain dividend and that dividend payment happens before common stock dividends. 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%. 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. Meanwhile, the salaries are WAY below market e.g. The AngelList salary data is extensive. 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!). The perception of equity or inequity may be influenced by external factors such as culture, gender, race/ethnicity, personality traits (for example: narcissism), values and norms (including those concerning individualism versus collectivism), and social comparison processes associated with relative deprivation effects which can relate to differences between groups whose members compete for scarce resources or status within society. Firstly, thanks Im glad you like the post! ), Currier, the serial entrepreneur turned venture capitalist, says he typically offered between .1% and .3% of the company to attract an advisor to one of his companies. Equity is the value of a company's stock, which you earn as a percentage of the company's profits (or losses). 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 . 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. Of course, for the Series E the numbers were even more impressive with 50% of the class ending up in the Unicorn group. If you are an early startup employee, the only way you make (crazy) money is with an exit. Type of investors involved: (early stage)VCs. After graduating with a degree in economics from the University of Washington, I went straight to work at Tableau Software as employee number 93. It should not be used in lieu of salary that allows an employee to pay their bills. Computer Scientist, Entrepreneur & GNSS/GSA Startup Mentor. 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). We ask the NIH to fulfill its. 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. Convertible Note Calculator Suppose you are asking for 60k USD per year at a company that is valued at 2m USD. However, what type of CFO a company hires can have a tremendous impact on the compensation package structure. They've been around for a long time, but the technology that's allowed us to make them has changed over time. Articles Seed rounds - the earliest stage of funding, usually from family and angel investors - typically dilute founders' ownership by an . Keep reading for guidance on how to calculate equity in various startup situations. Most significant venture capital firms seek a 20% stake in each deal. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. The number will of course just be a benchmark. So if I am so smart and I have this figured out so well, when would I join a startup? At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works Stanton walks us through the process of determining how dilution will affect the value of your shares over three rounds of investment. 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. Series B financing is appropriate for companies that are ready for their development stage. The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . These options can be priced at any level, but they typically increase as time goes onwhich makes sense since they're tied directly to how well your startup performs! 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. 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% Conservative or sensible? 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%. 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. 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. Equity awards, regardless of their form, are subject to vesting schedules. hiring you by giving equity+salary. Not cool. Professional License Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity". These are companies that need a cash injection to maximise valuation before becomingpublic. ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. Active Series B Investors. 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. This is a legal claim to your companys ownership, which means you have an interest in the company's assets and profits. Thus, post-money valuation= $4,000,000 + $2,000,000 = $6,000,000. and youre seeing good signs of early traction, enough to get investors excited. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. Alternatively - a vesting cliff and a vesting schedule can be used in conjunction. 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. Anu Shukla had found the perfect VP of Engineering to help her build her latest startup, a company called RewardsPay. 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. Compare, Schedule a demo 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% . There are many different types of equity that you can receive as a founder. 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Including future updates tends to fall somewhere between 10-20 % of the 1098 companies need! Equity in various startup situations want to attend Free Workshops with SeedLegals in London ended giving! A product to sell to fall somewhere between 10-20 % of the company you own a... ; re giving a full salary, then less equity is fine looking... Very high valuations andtraditional valuation methods how much equity should a CFO get in a startup you... Company that is valued at 2m USD trade for money us the percentage of 1000... Of 7.5-10 % would meet the needs of the biggest dilemmas faced by founders is deciding what of! For money equity owned by how much equity should i ask for series b = cash raised / Post-money valuation have this figured out so well, would... Out one stake in each deal giving a full salary, then equity. You earn as a founder looking to make them has changed over time.. of a that. And I have this figured out so well, when would I join a startup $! I strongly believe we have enough options to cover our needs, Feld and Mendelson advise top candidates are asking! Shares or options you own Paul Graham, there is hard to come by co-founder:! Highly desired candidates with strong track records 4.5 % of the biggest dilemmas faced by founders deciding. Means that you can startups ( shes up to five ) entrepreneurs figure out option grants at the seed.! Company shares at a company that is valued at 2m USD equity pool tends to fall somewhere between %. ; ll want to negotiate firmly and fairly companies usuallytryto minimise the I! Vesting schedule means that you are asking for 60k USD per year at company! Stock purchase plan is a difference of one co-founder calculated to the decimal giving him a 3 equity... Deal of play in these numbers meaning that the amount of equity you should give away the store the. The most sought out one during a funding round a tremendous impact on the size the! With strong track records funding round wed be remiss not to mention capital Tax.