The Co-Founder and CEO of Care.com talks about the winding road she took from a small coconut farm in the Philippines to becoming one of a handful women CEOs leading a publicly traded company. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. 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. Equity awards, regardless of their form, are subject to vesting schedules. 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. This is really what will decide the amount of equity you will have to trade for money. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. (Co-founders likely choose to draw a lower salary because they have compensation in the form of equity.) Negotiation in these cases is based on todays or the near-future valuation of the startup. The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. 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. API 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". 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. 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%. Let's say you just raised your Series B funding. 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. Of all the compensation questions, this is perhaps the most sought out one. Youre reading a preview of an online book. This is agnostic to company size and applies to early-stage startups to growth-stage companies and beyond. Health can be promoted by encouraging healthful activities, such as regular physical exercise and adequate sleep, and by reducing or avoiding unhealthful . See more at SlicingPie.com, I'd be happy to talk! General Dilution Per Round Data suggests that "after every round of capital that you raise . It's a universal formula for solving this exact problem. Meanwhile, the salaries are WAY below market e.g. 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. 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. This is the person we were asking to come in and build the technology and build our technology team, she adds. In addition, we are always aware of the market trends and common practices for any aspect of building and growing awesome and innovative companies! You'll be negotiating your equity as a percentage of the company's "Fully Diluted Capital." Fully Diluted Capital = the number of shares issued to founders ("Founder Stock") + the number of shares reserved for employees ("Employee Pool") + the number of shares issued to other investors ("preferred shares"). And even though that person was her own reflection looking in the mirror, those words have carried her through the thick of it all. Typical equity levels vary depending on the value the advisor brings, the maturity of the company, and the level of their involvement, which can vary from occasional phone-calls or introductions all the way up to being a kind of part-time, hands-on member of the team. 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. All Others: 0.05x. This is worth breaking down in further detail. 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. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. 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. 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. Methodology 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. 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. This is the tougher one. It's almost impossible to tell what the next game changer will look like. The mechanism is closer to bridge financing than straight up equity. For the simple reason that, at a certainpoint, everything comes down to either the investment amount or the equity stake. 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. 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. 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). If you own half of that business and have a partner who owns the other half (and they pay themselves), then you would receive 50% of the profits - or half of everything that was earned by the company during that time period (including sales revenue). This can range from 0.1% to 6%, depending on their role and how early they join the company. Director Careers In that case, they will be looking to lower the equity/salary component to make their outcome better. Ultimately, your company valuation is whatever you and your investors agree it is. Range:5% same amount of other founders. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. Lewis Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB Startup Banking. Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. (The company expectsto be left with (at a future date) at least as much as it had today.). hiring you by giving equity+salary. If you look at the Series D (5th round including seed) numbers above, you can see that there was a total class of 60 companies. 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. Co-founder of Silicon Roundabout & Managing Partner of Silicon Roundabout Ventures. 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). These parameters weren't plucked out of thin air. Some advisors say to raise as much as you can. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. 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. This is when the company (usually still pre-revenue) opens itself up to further investments. Something to note before hopping to the top table too soon. It's important to understand what you're asking for and why. 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. How it works in the real world is seldom so objective. 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% 33.3%-33.3%-33.3% is typical. And what about others a young startup seeks to enlist in the cause, including key advisors whose insights and connections might increase its chances of success or perhaps an outside director with the right expertise to join a nascent board of directors? You and your employees need to have a conversation to determine if this is a fair deal. So, using our $48,000 example above, it would take you a total of 5 years to fully vest your startup equity. Thanks for pointing out the math error though! It should also be realized that equity needs to be distributed. 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. 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. Compensation data is highly situational. The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. 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. I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. 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. 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. It's paramount to keep in mind that salary and equity compensation are two very different things. Based on what I've seen in the past, 0.5% to 3% is typical for an experienced VP post Series A funding. Ciao Giulia, nice post and it is reflective. 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. A type of equity that means you own a certain percentage, or share, of a company. More equity = more motivation. Convertible Note Calculator How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? Series C Funding Stage. Great book. Thanks to SeedLegals you can do a complete Bootstrap Round for just 700, just add investors and youre good to go. So, like a lot of questions, the answer is really, it depends. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. They are placing bets on you with the clear knowledge that most of their investments will give zero return. Don't believe me? This blog is the story of my financial journey. One other important formula tells us the percentage of equity sold to investors: Equity owned by investors = Cash raised / Post-money valuation. As stated already, In a Series A financing, you might expect a company to give up 20% to 25% of equity. Why Negotiation Matters Before accepting any job offer, you'll want to negotiate firmly and fairly. For startups, a variety of data is easier to come by. Equity is set by stage and position. If youre already in the startup world, theres a strong likelihood that you Founder equity (wed be surprised if you didnt! It is based on the idea that people are motivated to seek fairness in their interactions with others. 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. "You may have 1% now, but if the company brings in dozens of people with options, your interest will decrease because there's only 100% [to go around]," Starkman explains. Enjoy! Here are the most common forms: Founders stock. . 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. If you were to ask different VCs, theyre likely to come up with a wide variety of responses, including: Some VCs are led by their head, others by the heart. In brief, a vesting schedule means that you are given small allocations of your total equity grants or equity options over time.. 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. The reason for a 1218 month runway is that realistically youll need to be on the fundraising trail six months before youll have new money in the bank, and youll need to show growth between now and then to get new investors interested. 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. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. How much equity is given up in Series A? Any shorter than 12 months runway and its going to be hard to hit key milestones or show any real traction which means you are going to be unable to justify your next round valuation. 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. When the founders are always on the founding trail, product and sales can suffer,2. If you look online, you'll find that the most amount of equity being offered to early employees is around 2%. Lets take the hypothetical case of Jurassic Park Inc. again, and assume you are interviewing for the position of the CTO. You can ask and get 10% since the appraisal and interview process is always so subjective. Let's say it is $4M tops. VCs want to have, in most cases, companies that can reach 100 million turnover because they know thatthey are more likely to grow it toa billion. Although there is no concrete rule dictating how much equity an angel investor will take in exchange for financial support, the general expectation is between 20 and 40 percent. 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! 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. How Much Equity Should I Give Up in Series A? July 12th, 2022 | By: Sarah Humphreys This means that equity is now back in the options pool and the company can give new or existing employees equity. The entrepreneur can say, look, I strongly believe we have enough options to cover our needs, Feld and Mendelson advise. 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. 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. For Series B, expect roughly 33%. Equity should be used to entice a valuable person to join, stay, and contribute. 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. July 12th, 2022| By: Sarah Humphreys. The answer to this question can be approached in a couple of ways. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? 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. NSO - A non-qualified stock option is another employee stock that is simpler and more common than ISOs you pay ordinary income tax on the difference between the price when you exercise the option and the grant price.. These companies usuallytryto minimise the equity stake for the last investors. The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . Salary is a fixed amount of money; equity is a percentage of the company that you own. This practice of withholding options until you've hit a certain milestone is known as a vesting cliff. 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. 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