But Shukla knew sometimes you need to give up more to get the right person. 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. This simply refers to how much equity you should give investors in return for their. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. Of course, for the Series E the numbers were even more impressive with 50% of the class ending up in the Unicorn group. 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. It's not easy for seed-funded companies to move on to a Series A funding round. Equity, above all else, is power. 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 number will of course just be a benchmark. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. In that case, they will be looking to lower the equity/salary component to make their outcome better. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works The reason everyone wants to get in at a series A or series B startup is because there are so many incredible stories from people who did just that. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. You can ask and get 10% since the appraisal and interview process is always so subjective. So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5%. Some advisors say to raise as much as you can. 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. Founder's stock options. 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). Option #3. Wouldn't I miss my meal ticket by joining so late." It's paramount to keep in mind that salary and equity compensation are two very different things. We want to replace the 1218 month go big or go bust funding cycle into one where founders can raise capital at any time, to meet the companys needs. They're based on what an early equity investor is looking for in terms of return. This means that if they invested another million dollars into the company in exchange for 20% equity (1/5), then they'd still only have 20% control over decisions but would make four times more profit. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. 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. 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. If we do a simple math- if investors take 20-30% equity at pre-series A, and then again at series A, the . This theory focuses on determining whether the distribution of resources is fair to both relational partners. And even though that person was her own reflection looking in the mirror, those words have carried her through the thick of it all. Enjoy! (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.). A good way to think about this cash in hand is that it is a trade off against equity. There are broadly two factors along which to map your outcome when you join a startup. Jos Ancer provides a thoughtful overview. Lewis Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB Startup Banking. 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. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? So, how much should you ask for? Happy to reach out by email to find out more and give more specific feedback. 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. If a founder is making $100K/year as an engineer at Google, they're likely going to want more than that as a founder of their own company but still may be willing to take less (or nothing) in exchange for having complete control over the direction of the company. But it depends on what you're paying this person. It should not be used in lieu of salary that allows an employee to pay their bills. 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! My personal favorite early startup employee story is Doug Edward's "I'm Feeling Lucky", which documents his experience as Google employee #59 (stock options and all). How much should the CEO (co founder), CFO (co founder) and CTO (co founder) get respectively? Type of investors involved: later stage, growth VCs. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. Giving out equity may feel painless. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. Indeed, in many circumstances, the timing of an employees decision to join has a disproportionate impact on how much equity is offered. 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. This is the person we were asking to come in and build the technology and build our technology team, she adds. would appreciate really your answer. n is 5%, so 1/(1-0.05)=1.052. Jos Ancer gives another good overview for early stage hiring. 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. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. Something to note before hopping to the top table too soon. 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. 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. So youre already getting 4.5% of the company as your salary. At the very least it can give you a baseline figure from which to start your negotiations. 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. Analyzing the true picture of your long-term potential will allow you to more easily determine the correct mix.. 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. How much lower will depend significantly on the size of the team and the companys valuation. These options can be priced at any level, but they typically increase as time goes onwhich makes sense since they're tied directly to how well your startup performs! How Much Equity Should a CEO Have? 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. There are two types of CFOs: outward-facing and inward-facing. Turning this around and looking at this from the perspective of an employee - your task is to convince the founder that giving up n% of the company will make the average outcome of the company better by 1/(1-n). and youre seeing good signs of early traction, enough to get investors excited. and then look at your monthly burn rate again. The number of deals reaching this stage is relatively little. Remember to factor in a buffer for the unknown as anything can happen and usually does in startup land! With private companies, there's always the possibility of dilution. Currently, they are valued around $60b, meaning that the value of the initial stock grant would have grown over 300%. If a key hire is the third person joining a two-person team, he or she can almost be considered a co-founder and may get as much as 10% of the company. 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). Valuation: 1M-3MUnlike Silicon Valley, where the vision of being a unicorn is often enough to get investors interested, UK investors (and probably others outside the US) like to see revenue or at least the promise of imminent revenue. 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. FAQs Originally Answered: What's the typical equity split between three founders? It usually happens a few months after the constitution of the startup. 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. Of those companies that offer an EMI, a sizeable proportion also opt for a pool of 5% or 15% of equity. Focus: Valuation Range: 5% - 15%, average 10% . 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). It can be distributed in the form of stock options or shares. 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