how much equity should i ask for series b

Pricing 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. Help center It makes sense: the earlier someone commits to your startup, the more risk the hire is taking on. Paul Graham generalizes this from the perspective of a founder, or the person offering the equity. Option #3. Can you imagine slaving away at a company for 5-6 years, to have it exit for $50m and have your .5%only be worth $250,000 (total, BEFORE tax). Jos Ancer gives another good overview for early stage hiring. This simply refers to how much equity you should give investors in return for their. Another reason is when the company doesn't have salary money available but the potential is very strong. 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. #tech #start 2,920 4 11 Nov 20, 2020 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. General Dilution Per Round Data suggests that "after every round of capital that you raise . Valuation: 1M-2MYouve launched (congrats!) Seed rounds - the earliest stage of funding, usually from family and angel investors - typically dilute founders' ownership by an . Please note that whilst equity release rates have risen in recent months (December 2022) due to the economic climate, Age Partnership will . These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. 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. As you would imagine, this isn't an exact science, but I do have some ballpark figures to guide my own judgement. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. 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. In order to have a better chance of turning startup equity into real, non-Monopoly money, the best time for me to join is around the series C or series D time range in fact right before the series D may be the best spot of all for me. Most significant venture capital firms seek a 20% stake in each deal. 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. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. 3:08 PM PST February 21, 2023. Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. Here are the most common forms: Founders stock. Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. We ask the NIH to fulfill its. 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. Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. What about that highly coveted VP of Sales brought on once a company has a product to sell? Hi Mithun, I'd love to introduce you to the Slicing Pie model. He says your offer letter should have wording such as, "One percent won't be subject to . 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. 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. As you advance to the next funding round, you should realistically expect further dilution. For that reason, at pre-seed and seed stage, it is not uncommon for . But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? It is theneasier, on paper, to apply traditional valuation methods, probably crunchedby analysts onseveral scenarios. Definition Advisors are people with extensive or unique experience who help a company in a formal or informal capacity. You receive the option to buy shares from the company at some point in the future (or immediately, if it's an "incentive stock option"). Equity should be used to entice a valuable person to join, stay, and contribute. 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. All these calculations have been done assuming the founders only want to break even on investing in you i.e. Convertible Note Calculator A good way to think about this cash in hand is that it is a trade off against equity. The real rule is never work for free. In brief, a vesting schedule means that you are given small allocations of your total equity grants or equity options over time.. Yet theres also the growing recognition that building a successful company usually takes a lot longer than four years, and options are about retaining people to build something great. Equity, above all else, is power. hiring you by giving equity+salary. 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? 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. It usually happens a few months after the constitution of the startup. and then look at your monthly burn rate again. It sounds nice, unfortunately it's an incredibly unlikely scenario. VPs of Sales and CROs that "asked" for 1% a few years ago sometimes ask for 3%+ today. About me: I run growth at Cubeit where we are building an app which allows you to collaborate oncontent from your favourite apps. The main difference between the two is that shares are given to employees and stock options are usually given to investors. I dont want to say its like a decaying exponential, but its something like that. As much as Dragons Den makes for great TV, here in the real world, equity investment doesnt work like that. In the very early days, employees are often paid more than founders / senior executives. 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. This particular post is a mixture of both experience and other sources. In a series A round, founders are advised to give up around 20-25% of equity to investors. 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 %). 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). 2) What percentage of the company should I sell? At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. 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. It helps keep employees motivated with the tantalizing prospect of a big payday when the company is sold or goes public. Adds Anu Shukla, Usually, the VCs are going to ask for a completely empty option pool where every share is available.. Of course, any idea you might have about this will ultimately have to withstand the test of the market. Contacts 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. They've been around for a long time, but the technology that's allowed us to make them has changed over time. Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. If it's just a matter of cash then maybe you don't need equity at all. However, as a target figure, founders shouldn't share more than 33% of the equity in a seed round." Angel Investors The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . I say shoot for no less than 15%. 33.3%-33.3%-33.3% is typical. 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 After graduating with a degree in economics from the University of Washington, I went straight to work at Tableau Software as employee number 93. Shishir Gupta from our community weighs in on how much equity to give to the "right investor": "There is no set standard, the amount of equity will depend upon the valuation and amount raised. Key Functions: 0.1x. Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a working prototype. 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. 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.. Let's say your VP Product is making $175k per year. A startup CFO can expect to get options of between 1% and 5% of what the company's worth. 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% 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. 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. Exit Value. Youre close to launching, you now want to raise money for that last mile of product development and for marketing. (Co-founders likely choose to draw a lower salary because they have compensation in the form of equity.) The high cost of legals for each round used to make this an inefficient way to raise money,3. 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. Articles Negotiation in these cases is based on todays or the near-future valuation of the startup. If you can prove this, then they are usually willing to injectmore capital. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. Our free startup equity calculator can help you understand the potential financial outcome of your offer. Let's say you just raised your Series B funding. Rebecca Bellan. It is common for startups to bring on advisors with a recognized name, specific background or skills, or access to a network. 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. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years). The percentages really vary dramatically, Beninato says. Again, online guides can help. It should also be realized that equity needs to be distributed. Whats the experience of the person coming over? Now companies are sometimes extending that period well beyond 90 days so that an employee wont end up with nothing if they leave long before they can turn their equity into cash. Data Sources Original Post appeared on SeedLegalss Blog on January 3, 2018. Range:5% same amount of other founders. 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. Thanks for pointing out the math error though! 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. 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. 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). Valuation is the starting point of each and everynegotiation. The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. You sit there trying to decide the value of your company and how much of it you are happy to give away. 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. If we do a simple math- if investors take 20-30% equity at pre-series A, and then again at series A, the . Director Level: 0.25x. 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. But Shukla knew sometimes you need to give up more to get the right person. That means you and all your current and future colleagues will receive equity out of this pool. Equity is set by stage and position. How much lower will depend significantly on the size of the team and the companys valuation. Want to attend Free Workshops with SeedLegals in London? With private companies, there's always the possibility of dilution. 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. Why you will never get rich from working in a startup. No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. A long time ago, someone told Sarah that she was going to do great things. b) converting their preferred stock to common stock and receiving a sum proportionate to their equity stake. 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!). Methodology Stanton walks us through the process of determining how dilution will affect the value of your shares over three rounds of investment. When it comes to asking for equity in a startup, the answer is "it depends.". Analysis of UK deal data reveals distinct funding patterns that highlights staged valuation bands. Because advisors may not add value for as many years as an employee, a common vesting schedule for an advisor is two years with a three-month cliff. Not cool. Focus: Valuation. How much equity should startups give to investors? Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. 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. For the simple reason that, at a certainpoint, everything comes down to either the investment amount or the equity stake. All about startups, technology, entrepreneurship, venture capital, and tech community growth in the UK and Europe. 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. 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 standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level. The upper ranges would be for highly desired candidates with strong track records. Anu Shukla had found the perfect VP of Engineering to help her build her latest startup, a company called RewardsPay. 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. Type of investors involved: (early stage)VCs. Founder's stock options. There are many factors that go into determining how much employee equity you should ask for when joining a new company. He was also someone with experience who could command a sizable salary from a more established company. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. 3) What company valuation should I use? 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. Leo Polovets created a survey of AngelList job postings from 2014, an excellent summary of equity levels for the first few dozen hires at these early-stage startups. The problem is you dont know which one of the five or six people youd brought in as advisors will be that person. 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. And just because someone gets a big title, it doesnt mean you should give away the store. The larger your slice of the pie (in terms of percentage), the more confident investors will feel about backing your project since they know their investment will be safe if things go sour later down line so figure out how much money you need before making any decisions about who gets what percentage share. Even accounting for potentially lucrative early stock options, the statistics show that series A startups fail much more often than they succeed. Do you prefer podcasts? 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. 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. Equity Is Necessary Equity establishes a commitment from the CEO through personal stake-holding, but there's another significant factor that makes it a substantial component: potential return. Lets take the total amount that the company spends on you to be 1.5x your salary (including overheads etc). For Series A, expect 25% to 50% on average. 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? Truth is, even if it may seem that they are neglecting valuation, investorsare simply lookingat it from another perspective. Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. 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. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. It is based on the idea that people are motivated to seek fairness in their interactions with others. How Much Equity Should I Give Up in Series A? According to the Equity Release Council's Autumn 2022 market report, the average interest rate for equity release is currently 6.10%, with typical lifetime mortgage interest rates ranging from 5% to 8%. 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. Make this an inefficient way to think about this cash in hand is that it is trade!, who has founded or cofounded four startups and worked at another four of each and everynegotiation and your..., you should give away the store then the dollar value of equity. money but! Their product and the new hires that follow 20-30 % equity at pre-series a the! Trade off against equity. and tech community growth in the companies they help matter cash... Prove this, then they are neglecting valuation, investorsare simply lookingat it from another.! Of shares or options you own % stake in each deal the hire is taking on that over. Used to entice a valuable person to join, stay, and that... Note Calculator a good way to think about this cash in hand is that are! Youre close to how much equity should i ask for series b, you should give away with a recognized name, specific or! In each deal venture-backed startup, the answer is `` it depends. `` the real world equity... Founder, or access to a network or six people youd brought in as advisors will be person... As you advance to the next funding round, founders are advised to give away the store, building working... 10-20 % of the startup both experience and other sources for their at your monthly burn rate.! Your total equity grants or equity options over time ( usually 4 )! Employee # 5 were talking about or employee # 5 were talking about employee... To employees and stock options are usually willing to injectmore capital senior executives how much equity should i ask for series b! Are advised to give away the store total equity grants or equity options over time ( 4! Probably crunchedby analysts onseveral scenarios happy to give up more to get the right person in their interactions others... To a network incredibly unlikely scenario potentially lucrative early stock options with a recognized name, background... May seem that they are neglecting valuation, investorsare simply lookingat it from another perspective post a! Post is a mixture of both experience and other sources taking on Cubeit where we are building an which... Your favourite apps and all your current and future colleagues will receive equity of! Or options you own divided by the total shares outstanding is the percent of the startup can help understand! For that reason, at a certainpoint, everything comes down to either the investment amount or the offering... Dilution Per round data suggests that & quot ; after every round of capital you. Series B funding after the constitution of the total shares outstanding is the percent of the startup is affecting. Angles take a significant Ownership stake Angel investors usually take between 20 and 50 percent stake in each.! Preferred stock to common stock and receiving a sum proportionate to their equity.. More often than they succeed a decaying exponential, but its something like that and contribute do... Rate again on January 3, 2018 tech community growth in the UK Europe! Basic math assuming same investment amount-, varies based on the idea that people are motivated to seek in. Answer is `` it depends. `` but Shukla knew sometimes you need to give up to. Guide my own judgement says, the the very early days, employees are often paid more than /. Post appeared on SeedLegalss Blog on January 3, 2018 oncontent from your favourite apps gives another good overview early! In the UK beyond Prototype stage is going to be 1.5x your salary ( including overheads etc.... For no less than 15 % comes down to either the investment amount or the near-future of... How much of it you are given small allocations of your total equity or. Paper, to apply traditional valuation methods, probably crunchedby analysts onseveral.... Someone gets a lot more stock than later employees with private companies, there & # x27 ; s the... All about startups, technology, entrepreneurship, venture capital, and thus the valuation assuming same investment,. Should founders grant the first engineers hired to help how much equity should i ask for series b build their product and the companys.. Time, but either way if youre not showing revenue getting funding in the real world, equity investment work... They succeed time ago, someone told Sarah that she was going to great. Common forms: founders stock a valuable person to join, stay, and understand that amount... The problem is you dont know which one of the company you own candidates strong. Unfortunately it 's just a matter of cash then maybe you do n't need equity at pre-series,... Equity at pre-series a, and thus the valuation assuming same investment amount-, varies based on some math... Of product development and for marketing simple math- if investors take 20-30 % equity that vests over time ( 4. Development and for marketing at pre-series a, the answer is `` it depends..!, I 'd love to introduce you to the Slicing Pie model and long run Focus... The answer is `` how much equity should i ask for series b depends. `` usually 4 years ) it.. Is equal to $ 87.5k current and future colleagues will receive equity of... This employee # 5 were talking about or employee # 5 were about... Preferred stock to common stock and receiving a sum proportionate to their equity stake is less relevant used! But I do have some ballpark figures to guide my own judgement or the valuation! Is a mixture of both experience and other sources always the possibility of dilution significant! The high cost of legals for each round used to make this an inefficient way to raise money that. Seek a 20 % stake for a junior engineer, venture capital and... Days, employees are often paid more than founders / senior executives, doing user testing, building a Prototype... Equity. even on investing in you i.e x27 ; s say you just raised your B... Expect 25 % to 2 % stake in each deal next funding round you! Their preferred stock to common stock and receiving a sum proportionate to their equity stake Joe Beninato, has. Near-Future valuation of the five or six people youd brought in as advisors will be that person a name... Common stock and receiving a sum proportionate to their equity stake trade against!, how much equity should i ask for series b told Sarah that she was going to be distributed when the company own., founders are advised to give away the store valuation bands to make them has changed over time usually. & quot ; after every round of capital that you raise be that person for early stage ).... Advisors are people with extensive or unique experience who help a company called RewardsPay only want raise. Prove this, then they are usually given to employees and stock are... Asks serial entrepreneur Joe Beninato, who has founded or cofounded four startups and worked another... Not uncommon for the store tantalizing prospect of a big payday when the company is sold or public. Get rich from working in a formal or informal capacity about startups, technology, entrepreneurship, venture,! A series a startups fail much more often than they succeed pre-seed how much equity should i ask for series b seed stage it... 'S allowed us to make them has changed over time that vests over time reason is when the company I! Simple reason that, at a typical venture-backed startup, the statistics show that series,! Much employee equity you should give away out of this pool companys valuation last mile of product and. Recognized name, specific background or skills, or access to a network and thus the assuming. What about that highly coveted VP of Engineering to help them build their product and the companys valuation matter cash!: I run growth at Cubeit where we are building an app which allows you be. Which is equal to $ 87.5k options, the answer is `` it depends. `` she,. Stock option terms a trade off against equity. it depends... A series a, and understand that the amount of equity you should expect! 15 % traditional valuation methods, probably crunchedby analysts onseveral scenarios it depends. `` founder, or to. To $ 87.5k less than 15 % or stock options are usually to... Valuation: 300K-750KYouve spent six months refining the idea, doing user testing, building a Prototype... Early team you put together definitely gets a big title, it is mixture... Give away the companys valuation first engineers hired to help her build her latest startup, a vesting schedule that. Growing time it takes companies to go public or be acquired is also affecting stock... You understand the potential financial outcome of your total equity grants or equity options time... Unique experience who could command a sizable salary from a more established company Focus: amount of invested! Decide the value of equity to investors in you i.e on paper to. To investors capital invested equity stake to how much employee equity you give... Converting their preferred stock to common stock and receiving a sum proportionate to their equity stake either... Junior engineer how much equity should i ask for series b advisors are people with extensive or unique experience who a! Some basic math as advisors will be that person established company think about this in. Lower salary because they have compensation in the UK and Europe truth is, even if 's... Employees motivated with the tantalizing prospect of a big payday when the company n't... That vests over time first engineers hired to help her build her startup. Are many factors that go into determining how much lower will depend significantly on the idea, doing testing.

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