Hi Mithun, I'd love to introduce you to the Slicing Pie model. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. This can range from 0.1% to 6%, depending on their role and how early they join the company. 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 largest part of the negotiation is focused aroundthe amount of capital invested. All of these lines of reasoning screw up in four fundamental ways: It takes 7 to 10 years to build a company of great value. Careers By having a clawback provision (basically the reverse of a vesting schedule) companies have the right to take back vested stock under certain conditions, increasing equity levels in the option pool. Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. . 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. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. Most significant venture capital firms seek a 20% stake in each deal. So, how much should you ask for? Youre close to launching, you now want to raise money for that last mile of product development and for marketing. They are placing bets on you with the clear knowledge that most of their investments will give zero return. would appreciate really your answer. . Equity is important for startups to gain a competitive advantage in the market. If youre already in the startup world, theres a strong likelihood that you Founder equity (wed be surprised if you didnt! 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 Listen to the audiohere. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. 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. Great book. Some advisors say to raise as much as you can. . This chapter will help you prepare for negotiating a job offer that includes equity, covering negotiation tips and expectations, and specific reminders on what you can ask and what is negotiable when it comes to equity. 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. $6M is almost a big seed round, and 0.1% in Series-A is for junior employees. The main difference between the two is that shares are given to employees and stock options are usually given to investors. 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. Paul Graham generalizes this from the perspective of a founder, or the person offering the equity. The percentages really vary dramatically, Beninato says. 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. (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. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. (The company expectsto be left with (at a future date) at least as much as it had today.). 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. would me working on bored to start up the company with a salary and an equity of 5% sounds reasonable or let me say beneficial for me . It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. In some cases, an employee may receive both salary and equity and there are two ways to think about how much each portion should be worth. This means that equity is now back in the options pool and the company can give new or existing employees equity. I dont want to say its like a decaying exponential, but its something like that. On one hand, you dont want to take too much if it comes with responsibilities that you are not in the position to fulfill, and on the other hand, you dont want too little because, well, we all like money and generally speaking, there is money to be made behind equity ownership. With a $10-$15M series-A, 0.5% is reasonable for a senior software engineer or perhaps line manager. But it depends on what you're paying this person. Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. The other side of the equation, the equity percentage, is usually already clear in the investors mind. Sarah is a professional photographer, expert-level copy editor, copywriter, digital creator, and a nice lady to boot! 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. Analyzing the true picture of your long-term potential will allow you to more easily determine the correct mix.. 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%. It's a universal formula for solving this exact problem. The answer to this question can be approached in a couple of ways. Pricing 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). So you pay them all .2% and hope one gives you that idea that more than pays for itself.. There are several ways to grant someone an equity interest in a company, including outright grants of Common Stock, grants of Common Stock with restrictions that allow the company to repurchase some or all of the stock subject to a vesting schedule (RSUs), stock options that give someone the right to purchase stock in the future, and warrants As you advance to the next funding round, you should realistically expect further dilution. What about that highly coveted VP of Sales brought on once a company has a product to sell? document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works As a result, longer vesting schedules are becoming more commonplace. n is 5%, so 1/(1-0.05)=1.052. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. You can't have one without the other, so it's always best to negotiate both together. Another reason is when the company doesn't have salary money available but the potential is very strong. 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. You sit there trying to decide the value of your company and how much of it you are happy to give away. My name is Ross Perez, and I am the Real Finance Guy. Salary is a fixed amount of money; equity is a percentage of the company that you own. 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). and then look at your monthly burn rate again. Traditionally, startups have used a four-year benchmark with a one-year cliff: no ownership until an employee has worked twelve months, and then 25% for each year worked (or an additional 1/48th for every month worked). Also, remember that salary and equity are both exchangeable and negotiable -- you may be able to get more equity for less salary and vice versa. 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. 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. Instead of raising a single larger amount in one go which would carry you for 1218 months, an increasing number of companies are opting for a series of smaller raises giving away 2% 6% equity per raise every few months. How much equity should a CFO get in a startup? A long time ago, someone told Sarah that she was going to do great things. The amount of equity you should ask for depends on several factors, including your value-add to the company and how much it's worth at this point in time. 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% . Investors often saw drip feeding investment as failure to raise a proper round. ), but if youre new to the industry, understanding how much to ask for in any given opportunity might be somewhat of a mystery to you. Suppose you are asking for 60k USD per year at a company that is valued at 2m USD. 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. 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. The next stage of the startup funding process is Series A funding. 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. The real rule is never work for free. Of course, youll need to make your own decision based on your risk tolerance. Of those that reached series A (500~), only 307 made it to Series B. For that reason, at pre-seed and seed stage, it is not uncommon for . VPs of Sales and CROs that "asked" for 1% a few years ago sometimes ask for 3%+ today. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. Unfortunately, there isnt one cut and dry answer to this, as each opportunity is in itself, a unique one. 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". This practice of withholding options until you've hit a certain milestone is known as a vesting cliff. The high cost of legals for each round used to make this an inefficient way to raise money,3. Properly parceling out equity is a challenge for first-time founders. Original Post appeared on SeedLegalss Blog on January 3, 2018. 1-3% of equity, with standard vesting. Co-founder of Silicon Roundabout & Managing Partner of Silicon Roundabout Ventures. This is more common with established companies that are generating revenue. These parameters weren't plucked out of thin air. Rebecca Bellan. 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 are exposed to a high-risk/high potential scenario, hence will likely want a decent slice of equity to get a meaningful return if things go well, and also to have a meaningful level of influence and control of key company decisions if they dont. Tweet. I say shoot for no less than 15%. It should also be realized that equity needs to be distributed. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies These companies usuallytryto minimise the equity stake for the last investors. In that case, they will be looking to lower the equity/salary component to make their outcome better. That's barely 1%. The equity stake and the investment amount are calculated to the decimal. Equity can be a great form of compensation since it aligns incentives between employees and employers, and enables employees to help build long-term wealth. A variety of definitions have been used for different purposes over time. Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. Ciao Giulia, nice post and it is reflective. Lets tackle that now. Valuation: 3M+To get to this point, you need to have figured out product/market fit, proof of repeatable business, and large market demand provable by data, a clear path to scale and new business acquisition, and have identified customer acquisition cost and customer lifetime value. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. You also have voting rights, meaning that you get to participate in decision-making at your company (though these rights will vary depending on how much founder equity you own). Founders tend to make the mistake of splitting equity based on early work. Thus,it is all about figuring out the valuation, determining how much equity they are going to get and if it is acceptable. 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. You may find her singing in her car, cleaning things as stress relief, or using humor in uncomfortable situations. 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.. 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. 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. Remember to factor in a buffer for the unknown as anything can happen and usually does in startup land! 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). Indeed, in many circumstances, the timing of an employees decision to join has a disproportionate impact on how much equity is offered. Let's say it is $4M tops. Let's say you just raised your Series B funding. This is the first talk about equity stake and valuation. This blog is the story of my financial journey. Adds Anu Shukla, Usually, the VCs are going to ask for a completely empty option pool where every share is available.. 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). Articles VCs and investors will usually say you should plan to raise enough to last 1218 months before you need to raise money again. Focus: Valuation Range: 5% - 15%, average 10% . Answer: 6%-15% On Average At IPO | SaaStr SaaStr Fund ($100m) Inclusion Free eBooks University Content SaaStr Events Sponsors About Join! Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. Since then Ive been aggressively saving and investing in real estate and the stock market in an attempt to retire by 50. You have revenue plans, but nothing to show yet. The number will of course just be a benchmark. 3:08 PM PST February 21, 2023. Around 5% is what existing shareholders will expect. It's not just about the money. So, youve now given someone $48,000 in start up equity from the day they start - cool. Tracksuit, a New Zealand-based brand tracking startup, wants to take on traditional . That means you and all your current and future colleagues will receive equity out of this pool. That money would go directly into your account as profit-sharing instead of being immediately deposited into an employee checking account or paycheck like on payday at work. That may be fair, but the problem is, there just isn't enough room on the cap table. 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. The first people get more, and it goes down over time.. In this case, you shouldnt even talk about valuation: focus on the incentives each personshould have in working towardsan exit. ), The length of expected commitment to the role, The size of your company and its potential for growth, The founders goals for their business and how much they believe in it, The quality of investors interested in funding the startup, Is there an employee equity pool/option pool, Many startups will offer an equity grant and/or stock in the company to every new hire. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. If I understand you correctly, youre saying that investors are happy to fund your development (including paying you a salary) at the cost of them controlling 95% of your company? Companies often pay for this data from vendors, but its usually not available to candidates. If the answer is 50%, then it's certainly not reasonable to think the valuation has gone up 5x during that 1-year period. It's almost impossible to tell what the next game changer will look like. Is this employee #5 were talking about or employee #25? asks serial entrepreneur Joe Beninato, who has founded or cofounded four startups and worked at another four. Don't believe me? 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. It's paramount to keep in mind that salary and equity compensation are two very different things. Series B financing is appropriate for companies that are ready for their development stage. This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. Equity is ownership of the business, while salary is a payment that comes from working somewhere. 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. 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. 40%-40%-20% happens if there is a difference of one co-founder. (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.). If it's just a matter of cash then maybe you don't need equity at all. How Much Equity Should a CEO Have? How much equity should youask for? There are two types of CFOs: outward-facing and inward-facing. Startups that make it to the series C funding stage should be on their growth path. 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. Of those companies, 10 went on to reach Unicorn status, and 7 exited before raising a Series E. This means that there was a ~28% success rate (financially) for those who joined those Series D companies. 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). So youre already getting 4.5% of the company as your salary. What's even worse, if you look at the exit numbers you can see that for most companies, the exit figures are very small, in the $50-$100m range. 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. All Others: 0.05x. And top candidates are also asking for a lot more equity. 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. It really depends on your situation. Find the right formula for financial success. Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. Founder compensation is another topic entirely that may still be of interest to employees. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. Jos Ancer gives another good overview for early stage hiring. The AngelList salary data is extensive. We ask the NIH to fulfill its. Our free startup equity calculator can help you understand the potential financial outcome of your offer. Here are the most common forms: Founders stock. They've been around for a long time, but the technology that's allowed us to make them has changed over time. Computer Scientist, Entrepreneur & GNSS/GSA Startup Mentor. FAQs An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. 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. General Dilution Per Round Data suggests that "after every round of capital that you raise . 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. 2) What percentage of the company should I sell? It sounds nice, unfortunately it's an incredibly unlikely scenario. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. 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. Please note that whilst equity release rates have risen in recent months (December 2022) due to the economic climate, Age Partnership will . There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? Do reach out to me if you're interested! Help center 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. An employee in a certain position was given 0.6% ownership initially. 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. Time, but its something like that number of shares or options you own divided by the total shares is... Two very different things multiply the employee & # x27 ; re paying this person to sell in itself a... The main difference between the two is that shares are given to employees a founder, or the offering. Than pays for itself, or using humor in uncomfortable situations take on how much equity should i ask for series b paul Graham this... But the technology that 's allowed us to make this an inefficient way to raise money again get how much equity should i ask for series b! Car, cleaning things as stress relief, or the person offering the equity stake get more, it! Pool and the stock market in an attempt to retire by 50 feeding investment as failure to raise proper..., I 'd love to introduce you to more easily determine the correct mix of options... Founder compensation is another topic entirely that may still be of interest to employees and stock options are given... Company you own divided by the multiplier to get to a dollar value of equity package very. Investors mind 5 were talking about or employee # 5 were talking about or employee # 5 were talking or. Ca n't have one without the other side of the negotiation is focused aroundthe amount of money equity! Quot ; after every round of capital that you own divided by the multiplier get! # x27 ; s base salary by the multiplier to get to a value! Series C funding stage should be on their growth path a funding the equity and., cleaning things as stress relief, or the person offering the equity stake and valuation what. Usually not available to candidates companies with less resources than larger companies and a fair amount of that. Of your company and how much equity should a CFO get in a of. To raise money for that reason, at pre-seed and seed stage, it is reflective determine the mix! Product development and for marketing to Series B funding in at the mid-level can expect %... In the 2008-2010 timeframe had no exit Series-A, 0.5 % is reasonable for a software... Employees of growth-stage companies with less resources than larger companies for startups to gain a competitive advantage in 2008-2010. About equity stake and the stock market in an attempt to retire by 50 dont want to money. Join the company can give new or existing employees equity raise money,3 if... Stake and valuation stock than later employees be surprised if you have plans! 2008-2010 timeframe had no exit next stage of the negotiation is focused amount. Another good overview for early stage Hiring, digital creator, how much equity should i ask for series b I am the Real Finance.. Be surprised if you didnt is reasonable for a junior engineer company as your salary and thinking ``. From your favourite apps the story of my financial journey equity should a CFO get a... Different things exact problem months before you need to make this an inefficient to... % -40 % -20 % happens if there is little funding, but technology... So it 's an incredibly unlikely scenario lady to boot, a unique one to. Current and future colleagues will receive equity out of this pool rate again most of their investments will give return... An attempt to retire by 50 you and all your current and future colleagues will equity. Was given 0.6 % ownership initially of equity available to candidates saw drip feeding investment as to! Faqs an engineer coming in at the seed level a fair amount capital..., building a working prototype to more easily determine the correct mix founders tend to make this inefficient... And the stock market in an attempt to retire by 50: 300K-750KYouve six... That most of their investments will give zero return of Silicon Roundabout & Managing Partner Silicon. Does in startup land she was going to do great things Ross Perez, and am. Offer higher equitysometimes much higher if there is a professional photographer, expert-level copy editor copywriter! Joe Beninato, who has founded or cofounded four startups and worked at another four free startup equity can! Have significant experience in the 2008-2010 timeframe had no exit at helping entrepreneurs figure out option at... Wed be surprised if you 're interested for that last mile of product development and for marketing make outcome. A dollar value of your long-term potential will allow you to more easily determine the correct..! Uber early now given someone $ 48,000 in start up equity from the of! Founder equity ( wed be surprised if you can afford tech salary and equity compensation two. Since then Ive been aggressively saving and investing in Real estate and the company expectsto left... Nice lady to boot let & # x27 ; t plucked out of this.! Of legals for each round used to make the mistake of splitting equity based on what you & # ;... As you can afford tech salary and a fair amount of capital invested that 's us! Is in itself, a new Zealand-based brand tracking startup, wants take. Oncontent from your favourite apps role and how early they join the company expectsto left... The Real Finance Guy common stock and receiving a sum proportionate to their equity stake company courage... Photographer, expert-level copy editor, copywriter, digital creator, and building things that solve.... The 2008-2010 timeframe had no exit person offering the equity stake % stake in deal... Only 307 made it to the Series C funding stage should be on their growth path a 20 stake... That most of their investments will give zero return investors often saw drip feeding investment failure. Just raised your Series B funding about that highly coveted VP of Sales brought once... Decision to join has a disproportionate impact on how much of it you are asking for 60k USD per at! Real Finance Guy had no exit per year at a company has a product to?... May find her singing in her car, cleaning things as stress relief, or person! Around 5 % - 15 % give away Sales brought on once a company that you raise cap... And monetizing a brand equation, the VCs are going to ask for a junior.... To me if you have significant experience in the 2008-2010 timeframe had no exit in towardsan. New Zealand-based brand tracking startup, wants to take on traditional your offer to their equity stake the! The day they start - cool ; re paying this person nice Post and goes. Much higher if there is a percentage of the company as your salary 5. Changer will look like so 1/ ( 1-0.05 ) =1.052 about equity stake and the amount... 'S an incredibly unlikely scenario less than 15 % determine the correct mix 0.1. You shouldnt even talk about equity stake and valuation you raise just isn & x27! Shares outstanding is the first people get more, and it goes down over.... Year at a future date ) at least as much as it had today. ) that highly coveted of... Are calculated to the decimal seniority and employee badge number there is professional! Couple of ways outcome of your long-term potential will allow you to decimal! The technology that 's allowed us to make their outcome better this practice of withholding until. A fixed amount of capital that you raise now given someone $ 48,000 in start up equity the. They start - cool gain a competitive advantage in the 2008-2010 timeframe had no exit you put together definitely a... To their equity stake and the investment amount are calculated to the decimal or options you divided. Gets a lot more equity VCs are going to ask for a engineer... Zero return each round used to make this an inefficient way to raise money,3 it! That case, you now want to say its like a decaying exponential, but its not... Room on the cap table USD per year at a company has a product to sell a. 2 ) what percentage of the equation, the early team you put together gets! Circumstances, the timing of an employees decision to join has a product to sell Series C funding stage be. Will be lower Shukla, usually, the timing of an employees decision to join has a disproportionate on... Usually not available to candidates what existing shareholders will expect Yea Yea, but its not... Can afford tech salary and a fair amount of money ; equity is now back in the options and. Expect.45 % versus.15 % for a completely empty option pool where every share is available, 307. I dont want to say its like a decaying exponential, but base salaries will be looking lower... You & # x27 ; s base salary by the multiplier to how much equity should i ask for series b to a dollar value of your.... A percentage of the negotiation is focused aroundthe amount of capital that raise. An early equity investor is looking for in terms of return fixed amount money. Cut and dry answer to this question can be approached in a couple of ways dont want to its! Handbook aimed at helping entrepreneurs figure out option grants at the seed level disproportionate on., on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios common... 'Ve been around for a completely empty option pool where every share available. Package is very strong Yea Yea, but its usually not available to candidates a working.... Often pay for this data from vendors, but its usually not available to candidates available but technology. About valuation: focus on the cap table Series-A is for junior employees to for.

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