What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. Equity awards, regardless of their form, are subject to vesting schedules. 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. Find the right formula for financial success. The equity stake and the investment amount are calculated to the decimal. 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. Equity, above all else, is power. 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. This is the tougher one. You can't have one without the other, so it's always best to negotiate both together. (The company expectsto be left with (at a future date) at least as much as it had today.). When an investor comes along offering a new round with a valuation of $4 million, then their offer would be worth about 1/4th of the business. 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. Companies often pay for this data from vendors, but its usually not available to candidates. The AngelList salary data is extensive. 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. 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. 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 largest part of the negotiation is focused aroundthe amount of capital invested. 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. 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. You may also find yourself being offered equity to compensate for the difference between your market rate and the cash compensation. Active Series B Investors. 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. You have to look at each situation individually.. Already a Tech Co-Founder. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. 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. 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). He was also someone with experience who could command a sizable salary from a more established company. Different . . Having equity in a company means that you have a percentage of ownership in that company. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. 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? How Much Equity Should I Ask For? Buy it now for lifetime access to expert knowledge, including future updates. 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). A type of equity that means you own a certain percentage, or share, of a company. 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. Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. Our free startup equity calculator can help you understand the potential financial outcome of your offer. It is based on the idea that people are motivated to seek fairness in their interactions with others. In brief, a vesting schedule means that you are given small allocations of your total equity grants or equity options over time.. Help center Series A funding is generally much more significant than the funding procured through angel investors, with funds of more than $10 million usually being procured. 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. "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. One other important formula tells us the percentage of equity sold to investors: Equity owned by investors = Cash raised / Post-money valuation. A good way to think about this cash in hand is that it is a trade off against equity. For engineers in Silicon Valley, the highest (not typical!) Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. Existing investors will demand around 5%. After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. Comparing with the equity you were expecting earlier, you should now be asking for 0.5% more to get to the 5% ownership you were aiming for. Also, such companies generally come with solid valuations of more than $10 million. He says your offer letter should have wording such as, "One percent won't be subject to . When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. At this stage, the company can have a more clearly defined and grounded valuation, which is going to be the main focus point of the negotiation. After all, its an easy way to preserve your cash as you staff your startup with top-notch hires that can significantly increase your chances of success. Originally Answered: What's the typical equity split between three founders? 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. 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. It's a universal formula for solving this exact problem. 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. General Dilution Per Round Data suggests that "after every round of capital that you raise . 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. Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. For post-series B startups, equity numbers would be much lower. Type of investors involved: (early stage)VCs. 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.. That's why the VC game is so tough, and why it doesnt makes sense for me to join a series A or series B startup unless I get in as a founder. See more at SlicingPie.com, I'd be happy to talk! Is it based on experience or some data? Another reason is when the company doesn't have salary money available but the potential is very strong. To use this calculator, you'll need the following information: Last preferred price (the last price per share for preferred stock) Post-money valuation (the company's valuation after the last round of funding) Youre close to launching, you now want to raise money for that last mile of product development and for marketing. 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. Pre-money valuation + Cash raised = Post-money valuation. Equity is measured by comparing the ratio of contributions and benefits for each person. They're based on what an early equity investor is looking for in terms of return. And even though that person was her own reflection looking in the mirror, those words have carried her through the thick of it all. 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. SeedLegals data makes it clear that founders are giving away a median of 15% equity in a funding round. Conservative or sensible? Why you will never get rich from working in a startup. 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. Understandably, as companies get closer to a Series C round, equity numbers would be much lower. Giving out equity may feel painless. . Suppose you. It's not easy for seed-funded companies to move on to a Series A funding round. The . 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. Let's say your VP Product is making $175k per year. Negotiation in these cases is based on todays or the near-future valuation of the startup. This means that equity is now back in the options pool and the company can give new or existing employees equity. The series B company is giving roughly 2.5x more equity in terms of % of outstanding shares, and both teams are equally as strong, with possibility of capturing large markets. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. Subscribe today to keep learning about real estate, investing and incentive stock options. Tracksuit raises $5M to make brand tracking more accessible. 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. Something to note before hopping to the top table too soon. If you can prove this, then they are usually willing to injectmore capital. Want to attend Free Workshops with SeedLegals in London? The upper ranges would be for highly desired candidates with strong track records. And just because someone gets a big title, it doesnt mean you should give away the store. 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. Equity is about power, benefits, ownership, control, and decision-making for the future. Hi Shlomi! 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). . Any compensation data out there is hard to come by. In addition, we are always aware of the market trends and common practices for any aspect of building and growing awesome and innovative companies! What about that highly coveted VP of Sales brought on once a company has a product to sell? 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 . 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. So, like a lot of questions, the answer is really, it depends. That's barely 1%. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. For startups, a variety of data is easier to come by. Youll know when you get there. Equity, typically in the form of stock options, is the currency of the tech and startup worlds. 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. Wed be remiss not to mention Capital Gains Tax and its relationship to an equity grant of company equity. Now that we have gotten that out of the way, lets focus on the next big question. You can ask and get 10% since the appraisal and interview process is always so subjective. 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). VCs and investors will usually say you should plan to raise enough to last 1218 months before you need to raise money again. Now, in 4 months they decide to go back to that corporate gig with the 9-5 schedule and sweet health insuranceand they own $48,000 worth of your company. 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. 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. At that point, the option pool is coming from the founders shares and those of their earliest investor so Feld and Mendelson encourage founders to push back if they feel the VCs are asking for an unduly large option pool. Chief executive officer (CEO): 5-10% Chief operating officer (COO): 2-5% Vice president (VP): 1-2% Independent board member: 1% Director: 0.4-1.25% Lead engineer 0.5-1% Senior engineer: 0.33-0.66% Manager or junior engineer: 0.2-0.33% For post-series B startups, equity numbers would be much lower. 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). 3) What company valuation should I use? It helps keep employees motivated with the tantalizing prospect of a big payday when the company is sold or goes public. 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. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? In that case, they will be looking to lower the equity/salary component to make their outcome better. 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 2) What percentage of the company should I sell? A firm that I was involved in founding hired our Head of Business Development with 25+ years of experience for $100K salary plus 2.5% equity. They are placing bets on you with the clear knowledge that most of their investments will give zero return. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. 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. Of those that reached series A (500~), only 307 made it to Series B. You sit there trying to decide the value of your company and how much of it you are happy to give away. 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. Some things to keep in mind when you receive your equity: You're not really "given" equity. 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 %). At SeedLegals our goal is to make it fast, easy and efficient for companies to raise money at any time, and to intentionally set up funding rounds with this new flexibility in mind. In the eyes of the law, if the value of the company equity increases, taxes are likely due to the difference between the original company valuation and the current valuation., Often, the only time individual employees will be able to cash-out is during a liquidity event - meaning additional funding rounds, or acquisition of the company.. In short terms, equity refers to ownership of the company. 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. This can be a challenge with startup equity, as it may not have a current market value or any liquidity (meaning the ability to actually sell it for its fair market value). and then look at your monthly burn rate again. What youre hoping for is that one advisor who tells you something that triples the value of your company, he says. Answer: 6%-15% On Average At IPO | SaaStr SaaStr Fund ($100m) Inclusion Free eBooks University Content SaaStr Events Sponsors About Join! document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works Valuation at this stage is determined with a direct approach, these companiesusually have a track record, they have been existing for a while and they have comparables. 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. Exit Value. n is 5%, so 1/(1-0.05)=1.052. 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. Khosla Ventures; GV; StartX (Stanford-StartX Fund) 5. 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. Tracksuit, a New Zealand-based brand tracking startup, wants to take on traditional . 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. Data Sources Equity is usually divided among founders, investors, employees and advisors. That sounds like a lot of money, but when Google and AWS are hiring tens of thousands of people who make $100k per year in stock alone, it's not much at all. 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. 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"). 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. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. The next stage of the startup funding process is Series A funding. It sounds nice, unfortunately it's an incredibly unlikely scenario. 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. 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. 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. Don't believe me? Thus,it is all about figuring out the valuation, determining how much equity they are going to get and if it is acceptable. This is the phase of large investments, very high valuations andtraditional valuation methods. Founder compensation is another topic entirely that may still be of interest to employees. I would also adjust the numbers down if the company has received professional investment from a venture capital firm or a strategic partner. 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). At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. 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. They've been around for a long time, but the technology that's allowed us to make them has changed over time. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. 3:08 PM PST February 21, 2023. 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. Rebecca Bellan. As a result, longer vesting schedules are becoming more commonplace. How much lower will depend significantly on the size of the team and the companys valuation. However, as a target figure, founders shouldn't share more than 33% of the equity in a seed round." Angel Investors The percentages really vary dramatically, Beninato says. Pricing Preferred stock means you get a certain dividend and that dividend payment happens before common stock dividends. Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. Youre somewhere between Idea and Launch, with a valuation to match. 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. The dream is alive: find a young, promising startup, put in four years of hard work, and end up a deca-millionaire. 40%-40%-20% happens if there is a difference of one co-founder. At a companys earliest stages, expect to give a senior engineer as much as 1% of a company, the handbook advises, but an experienced business development employee is typically given a .35% cut. 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. 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. 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. Most large venture capital firms want to own 20% of each investment. The calculations above ignore the salary that the you have to be paid. First, there are many different types of companies; some are more likely to succeed than others. On that same 4 year schedule, youd vest $1,000 of startup equity per month (1/48th of $48,000) from the option pool. Great book. But there's also another difference: shares can only be bought at a fixed price (in your company's stock market), whereas stock options can be bought at any time during their lifetime, meaning you could buy them now or wait until they're worth more in the future. . 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. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. It's different from preferred stock, which usually goes to investors. My name is Ross Perez, and I am the Real Finance Guy. If the company is. Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. So, how much should you ask for? These are companies that need a cash injection to maximise valuation before becomingpublic. Range: 10 % 20%, average 15%. Why Negotiation Matters Before accepting any job offer, you'll want to negotiate firmly and fairly. It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. Articles Range:5% same amount of other founders. Again, online guides can help. Shukla ended up giving him a 3% equity share in the company. In this situation, you should be especially diligent in your analysis because you will realize that even the best-laid plans sometimes fall completely short. And top candidates are also asking for a lot more equity. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. July 12th, 2022| By: Sarah Humphreys.
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