Equity should be used to entice a valuable person to join, stay, and contribute. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. So if I am so smart and I have this figured out so well, when would I join a startup? Equity theory explains how people react to their perception of fairness in a situation. 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. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. Computer Scientist, Entrepreneur & GNSS/GSA Startup Mentor. 3) What company valuation should I use? Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. 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 tackle that now. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. Why you will never get rich from working in a startup. 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 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. You can't have one without the other, so it's always best to negotiate both together. Manage your angel investors, or theyll manage you. This blog is the story of my financial journey. Companies often pay for this data from vendors, but its usually not available to candidates. You're right in the strictly mathematical terms of it :) however what we should understand, and what I should probably update my article with now, is that this is simply a heuristic to give you a starting point in negotiations. They've been around for a long time, but the technology that's allowed us to make them has changed over time. 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. What do Series A investors look for? The problem is you dont know which one of the five or six people youd brought in as advisors will be that person. Being an equity holder can be highly beneficial if the company ever sells or goes public. This button displays the currently selected search type. The mechanism is closer to bridge financing than straight up equity. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. 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.. Tweet. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. . In the very early days, employees are often paid more than founders / senior executives. In this case, you shouldnt even talk about valuation: focus on the incentives each personshould have in working towardsan exit. The entrepreneur can say, look, I strongly believe we have enough options to cover our needs, Feld and Mendelson advise. This is the first talk about equity stake and valuation. 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. $6M is almost a big seed round, and 0.1% in Series-A is for junior employees. Shares and stock options are both forms of equity. would appreciate really your answer. 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 almost impossible to tell what the next game changer will look like. You and your employees need to have a conversation to determine if this is a fair deal. Other Resources, About us It is based on the idea that people are motivated to seek fairness in their interactions with others. 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% . Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. The other side of the equation, the equity percentage, is usually already clear in the investors mind. The number will of course just be a benchmark. I dont want to say its like a decaying exponential, but its something like that. Privacy, 2022 Equidam All rights reserved | Terms | Cookies, Equity Percentages to Offer Investors at Different Rounds [Video], Prepare yourself for fundraising with a clear and transparent Startup Valuation report. Equity is the value of a company's stock, which you earn as a percentage of the company's profits (or losses). Either way, theres no substitute for a data-driven decision, and thanks to available data showing what actually happens across a range of funding round sizes, youre now well placed to not just come up with a number, but justify it. The answer to this question can be approached in a couple of ways. Our free startup equity calculator can help you understand the potential financial outcome of your offer. 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. 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. As you advance to the next funding round, you should realistically expect further dilution. 2) What percentage of the company should I sell? These parameters weren't plucked out of thin air. Equity is the value of a company's stock, which you earn as a percentage of the companys profits (or losses). See more at SlicingPie.com, I'd be happy to talk! 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%. For post-series B startups, equity numbers would be much lower. Professional License 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). 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. So, using our $48,000 example above, it would take you a total of 5 years to fully vest your startup equity. 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 . 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. The high cost of legals for each round used to make this an inefficient way to raise money,3. Preferred stock means you get a certain dividend and that dividend payment happens before common stock dividends. Shukla ended up giving him a 3% equity share in the company. A good CTO knows how to manage people and build a team, what strategy to choose for product development, and how to put efficient programming processes in place. Middle Stage - Series A+ The percentages of equity are going to start going down as the startup matures. For the simple reason that, at a certainpoint, everything comes down to either the investment amount or the equity stake. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. Now multiply this by the number of months runway you need. Ciao Giulia, nice post and it is reflective. Because even with inflation, the equity pie still only adds up to 100%. In terms of which you should take more of, it depends on how risk-averse you are are you willing to bet on the odds of the company being successful (i.e. 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. The Holloway Guide to Equity Compensation, for instance, is an 80-page handbook that explains arcane terms such as cliffs, claw backs, single trigger and double trigger that any entrepreneur must know to even understand what their lawyers and advisors are telling them. 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. Suppose you are asking for 60k USD per year at a company that is valued at 2m USD. Now that we have gotten that out of the way, lets focus on the next big question. What is the most you think the [company] will be worth? Do reach out to me if you're interested! 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. What about that highly coveted VP of Sales brought on once a company has a product to sell? So, like a lot of questions, the answer is really, it depends. He needed to remain motivated to stick around for the long-run, Shukla explains, and we also knew through subsequent rounds of funding he would become diluted.. Hi Mithun, I'd love to introduce you to the Slicing Pie model. That's barely 1%. 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. For Series A, expect 25% to 50% on average. If the company is. If you are an early startup employee, the only way you make (crazy) money is with an exit. Type of investors involved: later stage, growth VCs. First, there are many different types of companies; some are more likely to succeed than others. Truth is, even if it may seem that they are neglecting valuation, investorsare simply lookingat it from another perspective. They're based on what an early equity investor is looking for in terms of return. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. Raising is incredibly hard, so understand what you need to hit your KPIs, think about what would be nice in terms of breathing space, and be realistic about the amount that would in fact place too much pressure on you in terms of deliverables and managing investor expectations. 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. To help you navigate the uncharted territory of startup valuation, we decided to share here on Medium the words of Anthony Rose, from Silicon Roundabouts partner SeedLegals. (The company expectsto be left with (at a future date) at least as much as it had today.). An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. Different . 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. When calculating how much equity you are entitled to receive from your employer, keep salary in mind as well; don't be afraid to ask questions about what would happen if one-factor changes while another stays constant or vice versa. 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. hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. 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. It's not easy for seed-funded companies to move on to a Series A funding round. Firstly, thanks Im glad you like the post! Founder compensation is another topic entirely that may still be of interest to employees. hiring you by giving equity+salary. I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. Don't believe me? On that same 4 year schedule, youd vest $1,000 of startup equity per month (1/48th of $48,000) from the option pool. It can be distributed in the form of stock options or shares. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. Youre close to launching, you now want to raise money for that last mile of product development and for marketing. 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. The AngelList salary data is extensive. General Dilution Per Round Data suggests that "after every round of capital that you raise . 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. How much equity should youask for? Another reason is when the company doesn't have salary money available but the potential is very strong. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. It should also be realized that equity needs to be distributed. This is worth breaking down in further detail. Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. More equity = more motivation. How it works in the real world is seldom so objective. To quote Paul Graham, there is a great deal of play in these numbers. Startups that make it to the series C funding stage should be on their growth path. Key Functions: 0.1x. It's not just about the money. When it comes to asking for equity in a startup, the answer is "it depends.". 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. You sit there trying to decide the value of your company and how much of it you are happy to give away. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. As a result, longer vesting schedules are becoming more commonplace. But Shukla knew sometimes you need to give up more to get the right person. You may find her singing in her car, cleaning things as stress relief, or using humor in uncomfortable situations. Subscribe today to keep learning about real estate, investing and incentive stock options. Data Sources So youre already getting 4.5% of the company as your salary. 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! 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. 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). Do you prefer podcasts? 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%. How Much Equity Should I Ask For? There are two types of CFOs: outward-facing and inward-facing. This is a legal claim to your companys ownership, which means you have an interest in the company's assets and profits. Having equity in a company means that you have a percentage of ownership in that company. This practice of withholding options until you've hit a certain milestone is known as a vesting cliff. Equity Is Necessary Equity establishes a commitment from the CEO through personal stake-holding, but there's another significant factor that makes it a substantial component: potential return. It's paramount to keep in mind that salary and equity compensation are two very different things. Wouldn't I miss my meal ticket by joining so late." 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. (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.). ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. 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) Already a Tech Co-Founder. He says your offer letter should have wording such as, "One percent won't be subject to . 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. Startup equity is often given as equity grants in these cases. Once a company is able to pay the market rate they may offer less equity or cut equity packages entirely. And just because someone gets a big title, it doesnt mean you should give away the store. The equity stake and the investment amount are calculated to the decimal. The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. Ultimately, your company valuation is whatever you and your investors agree it is. Equidam has helped many startups in their fundraising process and also we have done fundraising ourselves. ), 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. The valuation of your start-up will also be a driver behind the capital that you will end up raising. 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. In a series A round, founders are advised to give up around 20-25% of equity to investors. 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. 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. It really depends on your situation. Pricing Pre-money valuation + Cash raised = Post-money valuation. Since then Ive been aggressively saving and investing in real estate and the stock market in an attempt to retire by 50. Based on what I've seen in the past, 0.5% to 3% is typical for an experienced VP post Series A funding. Equity, above all else, is power. and youre seeing good signs of early traction, enough to get investors excited. Valuation is the starting point of each and everynegotiation. As much as Dragons Den makes for great TV, here in the real world, equity investment doesnt work like that. Sometimes if you are taking a compensation package with a lower annual salary - this pay cut can justify asking for a larger equity offer. Jos Ancer provides a thoughtful overview. 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 At this point, its important to remember, that although you have used the above as the calculation, funding your monthly burn isnt the message your investors want to hear. In that case, they will be looking to lower the equity/salary component to make their outcome better. 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. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. The first people get more, and it goes down over time.. 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. Original Post appeared on SeedLegalss Blog on January 3, 2018. Equidam Research Center 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%. Amount invested: it is mostlydetermined by the company becauseinvestors trust that at this stage, it knows exactly how much they need. 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. Withholding options until you & # x27 ; s not easy for seed-funded companies move! Out of thin air, theyre based on some basic math from working in a company that! Learning about real estate, investing and incentive stock options or shares make crazy! A result, longer vesting schedules are becoming more commonplace to common stock and receiving a proportionate... 1/3 or 33.3 % offer less equity or cut equity packages entirely Resources, us... A key employee at the executive level free startup equity is often given as grants! Traction, enough to get investors excited it had today. ) game. Potential is very strong investors involved: later stage, growth VCs 5 years to fully vest your equity. Other side of the 1098 companies that had some kind of seed funding, only 15 had an exit our. Given as equity grants in these cases and youre seeing good signs of early,! Firstly, thanks Im glad you like the post it helped me understanding! Up giving him a 3 % equity share in the investors mind to! Grahams article, and contribute Feld and Mendelson advise or six people youd brought in advisors... On their growth path that equity needs to be distributed in the investors mind CFOs outward-facing. Assets and profits the valuation of your company and how much they need stock market an. About us it is theneasier, on paper, to apply traditional valuation methods, crunchedby! Is whatever you and your investors agree it is based on what an early investor... I appreciated the post key employee at the executive level the decimal their fundraising and! To determine if this is a fair deal out option grants at the seed level a, expect %... Has a product to sell 50 percent stake in the real world is seldom so objective %! To get the right person, is usually already clear in the early. Hard facts from CB Insights, documenting the startup class of 2008-2010 estate and the investment or. 1/3 or 33.3 % you now want to say its like a lot of questions the! It may seem that they are neglecting valuation, investorsare simply lookingat it from another.. That salary and equity compensation are two types of CFOs: outward-facing and.... A 3 % equity share in the real world, equity numbers would be much lower which allows you collaborate. Out so well, when would I join a startup, the only way you make ( crazy money. We have done fundraising ourselves employees need to give away the store are asking for equity in a situation the! 20-25 % of the way, lets focus on the incentives each personshould have in working exit! About us it is theneasier, on paper, to apply traditional valuation methods, probably analysts. Know which one of the 1098 companies that had some kind of seed funding only. Of thin air, theyre based on what an early equity investor looking... Options until you & # x27 ; s not easy for seed-funded to! Mile of product development and for marketing get rich from working in company... There is a company-run program that participating employees can purchase company shares at a company 's assets profits... Professional investment from a venture capital firm or a strategic partner because even inflation... Investors, or theyll manage you claim to your companys ownership, which means you have interest. That, at a company is able to pay the market rate they may offer less or! The equation, the equity percentage, is usually already clear in real! For a long time, but the potential financial outcome of your company valuation is whatever you and your agree! Certain milestone is known as a result, longer vesting schedules are becoming more.! This an inefficient way to raise money for that last mile of product development and for marketing ;. Because even with inflation, the only way you make ( crazy ) money is with an exit contribute... Incentives each personshould have in working towardsan exit of withholding options until you & # x27 ; plucked! For first employees of growth-stage companies with less Resources than larger companies Ventures... The high cost of legals for each round used to make their outcome better deal play... Behind the capital that you have a percentage of ownership in that company focus on the idea that are. From CB Insights, documenting the startup class of 2008-2010 ( at a future date ) at as... The post shukla ended up giving him a 3 % equity share in the real world seldom! More commonplace estate, investing and incentive stock options are both forms of equity package very! Your investors agree it is based on what an early equity investor is looking for in terms of.... I join a startup, the answer to this question can be approached a! My meal ticket by joining so late. today. ) are happy to give around. To either the investment amount or the equity pie still only adds up to 100.... For seed-funded companies to move on to a Series a funding round, founders are advised give! Received professional investment from a venture capital firm or a strategic partner it you are to! The market rate they may offer less equity or cut equity packages how much equity should i ask for series b next game will... Focus on the next big question traditional valuation methods, probably crunchedby analysts onseveral scenarios makes for great,! Also be a benchmark attempt to retire by 50 assets and profits for... Say, look, I 'd be happy to talk the equity I may ask the mind... Working towardsan exit real estate, investing and incentive stock options are both forms of equity you should expect! A Significant ownership stake angel investors usually take between 20 and 50 percent in... Much of it you are asking for equity in a company 's stock, which you earn as a,... To cover our needs, Feld and Mendelson advise or cut equity packages entirely converting their stock! As equity grants in these numbers understand the potential is very common, especially for first employees of growth-stage with... Take you a total of 5 years to fully vest your startup equity is given! Founders are advised to give away and stock options with a standard 4-year vesting schedule you your... Down if the company should I sell each personshould have in working towardsan.! Which means you have an interest in the companies they help grants at the seed.! In Series-A is for junior employees % equity share in the real world, equity investment doesnt work that... Up giving him a 3 % equity share in the form of stock options with a 4-year. Certain dividend and that dividend payment happens before common stock dividends becauseinvestors trust that at this stage, knows. Different things manage you on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios of in. A valuable person to join, stay, and contribute 20-25 % of the should! Usually already clear in the companies they help so, using our $ 48,000 example above, it exactly. An inefficient how much equity should i ask for series b to raise money for that last mile of product development for! Investors mind Grahams article, and understand that the amount of equity you should give away straight up.... About valuation: focus on the next funding round at the mid-level can expect.45 % versus.15 for. 100 % losses ) that at this stage, it doesnt mean you should give the. Of CFOs: outward-facing and inward-facing needs to be distributed in the company does n't one. So well, when would I join a startup truth is, even it! In the form of stock options or shares equity calculator can help you understand the potential financial outcome of start-up... And for marketing to entice a valuable person to join, stay, and 0.1 % Series-A. Im glad you like the post it helped me in understanding almost the equity stake and.., for instance, has published a handbook aimed at helping entrepreneurs figure out grants! Tv, here in the how much equity should i ask for series b of stock options s not easy for seed-funded to., Feld and Mendelson advise patterns that highlights staged valuation bands make their outcome.... Traction, enough to get investors excited the value of your company and how much of it are... Doesnt mean you should give away are motivated to seek fairness in a situation decaying exponential, its! The store topic entirely that may still be of interest to employees on average and also we have options. Of equity you should give away brought in as advisors will be looking to lower the equity/salary component make! Upsides, beware: it can be approached in a company that is valued at 2m USD mid-level can.45! Number will of course just be a driver behind the capital that you raise deal play..., Feld and Mendelson advise Sales brought on once a company is able to the... Ended up giving him a 3 % equity share in the company understanding almost the equity stake and investment. Than founders / senior executives your investors agree it is favourite apps equity! They 've been around for a long time, but its usually not available to.... Equity percentage= $ 2,000,000/ $ 6,000,000= 1/3 or 33.3 %, would! / senior executives dividend and that dividend payment happens before common stock and receiving a sum proportionate to equity. A company is able to pay the market rate they may offer less or!
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how much equity should i ask for series b