hiring you by giving equity+salary. 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. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. It should not be used in lieu of salary that allows an employee to pay their bills. 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. 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. 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. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5%. 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. However, what type of CFO a company hires can have a tremendous impact on the compensation package structure. and then look at your monthly burn rate again. 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. Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. Great book. Compare, Schedule a demo 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. 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. Help center The series D has about 10x-15x more annual revenue but lower margins. That means you and all your current and future colleagues will receive equity out of this pool. 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. What about that highly coveted VP of Sales brought on once a company has a product to sell? The number of deals reaching this stage is relatively little. 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. On that same 4 year schedule, youd vest $1,000 of startup equity per month (1/48th of $48,000) from the option pool. 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. 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. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. 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. The first people get more, and it goes down over time.. 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% 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. Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. You ask for 5%. 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. #tech #start 2,920 4 11 Nov 20, 2020 By that point, she had founded or cofounded several venture-backed startups (shes up to five). Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. 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. 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!). . In short terms, equity refers to ownership of the company. The owner of these options has no obligation not only because they don't need approval from anyone else; this lets them decide when it's right for them financially before buying out those shares. Once a company is able to pay the market rate they may offer less equity or cut equity packages entirely. With private companies, there's always the possibility of dilution. You have to look at each situation individually.. Professional License Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. Keep reading for guidance on how to calculate equity in various startup situations. Let's say it is $4M tops. 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. Remember to factor in a buffer for the unknown as anything can happen and usually does in startup land! Jos Ancer provides a thoughtful overview. Conservative or sensible? hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. 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. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. Articles Don't believe me? For post-series B startups, equity numbers would be much lower. Subscribe today to keep learning about real estate, investing and incentive stock options. 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. 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. The number will of course just be a benchmark. How Much Equity Should I Ask For? 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 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. The largest part of the negotiation is focused aroundthe amount of capital invested. Key Functions: 0.1x. Based on what I've seen in the past, 0.5% to 3% is typical for an experienced VP post Series A funding. Founders start with 100% ownership. Of all the compensation questions, this is perhaps the most sought out one. Suppose you are asking for 60k USD per year at a company that is valued at 2m USD. Want to attend Free Workshops with SeedLegals in London? 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. 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. A variety of definitions have been used for different purposes over time. A good way to think about this cash in hand is that it is a trade off against equity. The high cost of legals for each round used to make this an inefficient way to raise money,3. 15% would give you $600,000. Youll know when you get there. This is when the company (usually still pre-revenue) opens itself up to further investments. Giving away company equity in a startup. We give some overview here of early-stage Silicon Valley tech startups; many of these numbers are not representative of companies of different kinds across the country: important One of the best ways to tell what is reasonable for a given company and candidate is to look at offers from companies with similar profiles on AngelList. Methodology Also, such companies generally come with solid valuations of more than $10 million. At the very least it can give you a baseline figure from which to start your negotiations. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. 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 barely 1%. Tweet. Lets take the hypothetical case of Jurassic Park Inc. again, and assume you are interviewing for the position of the CTO. 40%-40%-20% happens if there is a difference of one co-founder. It's not easy for seed-funded companies to move on to a Series A funding round. 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. 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. 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. Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. 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. 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). In my opinion, later stage startups are a much better balance of risk and reward, with a similar depth of experience and culture that people are looking for at startups. When the founders are always on the founding trail, product and sales can suffer,2. 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. As a rule of thumb, a non-founder CEO joining an early-stage startup (that has been running less than a year) would receive 7-10% equity. This is worth breaking down in further detail. 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. Founders can reward their early employees by giving them some equity ownership of your business. The other side of the equation, the equity percentage, is usually already clear in the investors mind. 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