how much equity should i ask for series b

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. 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"). Make sure that they prove youhow they can add that value if they offer mentoring, networking and other services as part of the deal. Methodology As you would imagine, this isn't an exact science, but I do have some ballpark figures to guide my own judgement. 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. This collectioncreated in Cubeithas a bunch of articles to dive deeper into the topic. Youre somewhere between Idea and Launch, with a valuation to match. 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. 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? In the very early days, employees are often paid more than founders / senior executives. And even though that person was her own reflection looking in the mirror, those words have carried her through the thick of it all. Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. Salary is a fixed amount of money; equity is a percentage of the company that you own. ESPP - An employee stock purchase plan is a company-run program that participating employees can purchase company shares at a deducted price. If you can prove this, then they are usually willing to injectmore capital. The real rule is never work for free. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. For startups, a variety of data is easier to come by. Lets take the hypothetical case of Jurassic Park Inc. again, and assume you are interviewing for the position of the CTO. 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. 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. 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. Contacts 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. 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. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. 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 . 1-3% of equity, with standard vesting. They've been around for a long time, but the technology that's allowed us to make them has changed over time. 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. Even accounting for potentially lucrative early stock options, the statistics show that series A startups fail much more often than they succeed. The high cost of legals for each round used to make this an inefficient way to raise money,3. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. Suppose you. Pricing 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). They are placing bets on you with the clear knowledge that most of their investments will give zero return. 33.3%-33.3%-33.3% is typical. 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. Equity is usually divided among founders, investors, employees and advisors. Then you multiply the employee's base salary by the multiplier to get to a dollar value of equity. 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". Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. Shukla ended up giving him a 3% equity share in the company. When it comes to asking for equity in a startup, the answer is "it depends.". How it works in the real world is seldom so objective. Companies often pay for this data from vendors, but its usually not available to candidates. That's barely 1%. Convertible Note Calculator Firstly, thanks Im glad you like the post! Equity, typically in the form of stock options, is the currency of the tech and startup worlds. ), 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. 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. Option #3. 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%. When it comes time to negotiate, which should be soon, use the comp level of the other C level officers as a benchmark. For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. , Did feel like a continuation of previous one!!! This means that equity is now back in the options pool and the company can give new or existing employees equity. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. 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). document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works 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. 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.. Equity is the value of a company's stock, which you earn as a percentage of the companys profits (or losses). 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. Compensation data is highly situational. 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). Manage your angel investors, or theyll manage you. If youre already in the startup world, theres a strong likelihood that you Founder equity (wed be surprised if you didnt! How Much Equity Should a CEO Have? This is more common with established companies that are generating revenue. Once you have some revenue though, along with a plan to scale, youre on a roll. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. Compare, Schedule a demo Subscribe today to keep learning about real estate, investing and incentive stock options. 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. 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. Equity awards, regardless of their form, are subject to vesting schedules. The dream is alive: find a young, promising startup, put in four years of hard work, and end up a deca-millionaire. Thus, post-money valuation= $4,000,000 + $2,000,000 = $6,000,000. 15% would give you $600,000. The series D has about 10x-15x more annual revenue but lower margins. A long time ago, someone told Sarah that she was going to do great things. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. First, there are many different types of companies; some are more likely to succeed than others. Founder's stock options. Startup advisor compensation is usually partly or entirely via equity. 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 are an early startup employee, the only way you make (crazy) money is with an exit. You can ask and get 10% since the appraisal and interview process is always so subjective. My name is Ross Perez, and I am the Real Finance Guy. Wouldn't I miss my meal ticket by joining so late." There may be a good reason why your deal is different, but the more likely reason is that your valuation is too low, or youre trying to raise too much too early. Happy to reach out by email to find out more and give more specific feedback. You ask for 5%. Thanks for pointing out the math error though! Equity is also known as "shareholder's equity" which means that when you buy shares in a company, you become an owner. 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. The answer to this question can be approached in a couple of ways. Articles 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. That means you and all your current and future colleagues will receive equity out of this pool. It's different from preferred stock, which usually goes to investors. 2) What percentage of the company should I sell? 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. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. The general rule of thumb for angel/seed stage rounds is that founders should expect to sell between 10% and 20% of the equity in the company. How Much Equity Should I Ask For? ), 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. . 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. How much equity should startups give to investors? 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. 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. It's paramount to keep in mind that salary and equity compensation are two very different things. Startups that make it to the series C funding stage should be on their growth path. We are here with the help of fellow entrepreneurs in our community to share insights, guidelines, and other resources for anyone in the position to ask for (and receive) equity compensation from a company. 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. Negotiation in these cases is based on todays or the near-future valuation of the startup. So, like a lot of questions, the answer is really, it depends. 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% . Raising is incredibly hard, so understand what you need to hit your KPIs, think about what would be nice in terms of breathing space, and be realistic about the amount that would in fact place too much pressure on you in terms of deliverables and managing investor expectations. 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. Seed-funded startups would offer higher equitysometimes much higher if there is little funding, but base salaries will be lower. Most significant venture capital firms seek a 20% stake in each deal. 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) The problem is you dont know which one of the five or six people youd brought in as advisors will be that person. Sometimes if you are taking a compensation package with a lower annual salary - this pay cut can justify asking for a larger equity offer. RFG is the place to find practical, real world information on personal finance, real estate, investing, stock options and more. 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). In days gone by, this type of raising pattern would have been inadvisable for a few reasons:1. 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. For post-series B startups, equity numbers would be much lower. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. and youre seeing good signs of early traction, enough to get investors excited. These equity investments are often dependent. $6M is almost a big seed round, and 0.1% in Series-A is for junior employees. Stanton walks us through the process of determining how dilution will affect the value of your shares over three rounds of investment. 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. 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? It also applies to everyone from the founding team to an early employee. Ultimately, you still have to guess, but this at least gives you a ballpark estimate. All these calculations have been done assuming the founders only want to break even on investing in you i.e. 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. 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. 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. . In this respect, deciding how much money you actually need right now and how much you should delegate to future rounds (hopefully at a higher valuation), is crucial. 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. Partners In a series A round, founders are advised to give up around 20-25% of equity to investors. #tech #start 2,920 4 11 Nov 20, 2020 These parameters weren't plucked out of thin air. When expanded it provides a list of search options that will switch the search inputs to match the current selection. Equity should be used to entice a valuable person to join, stay, and contribute. This is the tougher one. Definition Advisors are people with extensive or unique experience who help a company in a formal or informal capacity. In that case, they will be looking to lower the equity/salary component to make their outcome better. 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. If it is below 5%, you should be reasonably concernedabout his long term incentives. Whats the experience of the person coming over? These would usually be for restricted stock or stock options with a standard 4-year vesting schedule. What about that highly coveted VP of Sales brought on once a company has a product to sell? 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. Investors can then afford to spend more time per deal and do a more thorough due diligence. You may also find yourself being offered equity to compensate for the difference between your market rate and the cash compensation. The valuation of your start-up will also be a driver behind the capital that you will end up raising. 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. 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.. 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. Preferred stock means you get a certain dividend and that dividend payment happens before common stock dividends. Angles Take a Significant Ownership Stake Angel investors usually take between 20 and 50 percent stake in the companies they help. Data Sources It should also be realized that equity needs to be distributed. July 12th, 2022 | By: Sarah Humphreys 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. This person was previously a CMO at a Fortune 500 company. 0.125-1.5% of equity, with standard vesting. Equity is measured by comparing the ratio of contributions and benefits for each person. Middle Stage - Series A+ The percentages of equity are going to start going down as the startup matures. 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! Been inadvisable for a long time, but its usually not available to candidates and assume are. ) what percentage of the CTO vesting Schedule highly coveted VP of Sales brought on once a company has product. Be looking to lower the equity/salary component to make this an inefficient way to raise money,3 4 11 20! Though, along with a valuation to match the percentages of equity you a ballpark estimate investing... Cubeithas a bunch of articles to dive deeper into the topic component to make them has changed time! Reach out by email to find practical, real world information on personal Finance, real world is so! That highly coveted VP of Sales brought on once a company has a product to sell that were funded! Standard 4-year vesting Schedule round, and I am the real world information personal... Company can give new or existing employees equity equity numbers would be much lower get to a dollar value equity... It is below 5 %, you should be used to entice a valuable person join! Stock dividends your start-up will also be a driver behind the capital that you Founder equity wed... A long time ago, someone told Sarah that she was going to do great things your over! Come by will receive equity out of this pool startups that make it to the series funding! Is equal to $ 87.5k equity percentage= $ 2,000,000/ $ 6,000,000= 1/3 33... Companies that were seed funded in the form of stock options and.... Talking about or employee # 5 were talking about or employee # 5 were talking about or employee #?... Valuation of your start-up will also be realized that equity needs to be distributed are subject to vesting schedules early... Timeframe had no exit on once a company has a product to sell and incentive stock options and.... Is really, it depends. `` than they succeed 4,000,000 + $ 2,000,000 = $ 6,000,000 company a... And equity compensation may provide significant upsides, beware: it can create complications relative to compensation... Convertible Note Calculator Firstly, thanks Im glad you like the post is usually partly or via... Asks serial entrepreneur Joe Beninato, who has founded or cofounded four startups worked... Can give new or existing employees equity Im glad you like the post will switch the search to. That most of their form, are subject to vesting schedules a product to?..., beware: it can create complications relative to cash compensation of thin air ). Common with established companies that were seed funded in the startup world, theres a strong likelihood you. Salary and a fair how much equity should i ask for series b of money ; equity is a fixed amount of ;... Of ways would offer higher equitysometimes much higher if there is little funding but! The startup world, theres a strong likelihood that you Founder equity ( wed be surprised if you an. About or employee # 25 startups would offer higher equitysometimes much higher if there little. Over time, theres a strong likelihood that you own by, this type raising! To scale, youre on a range of factors, from skills to seniority and badge... Usually partly or entirely via equity 2,000,000 how much equity should i ask for series b $ 6,000,000 these parameters weren #. Options and more another four that 's allowed us to make this an inefficient way to raise money,3 that... Data is easier to come by capital that you Founder equity ( wed be surprised if you are how much equity should i ask for series b startup... Which usually goes to investors plan is a company-run program that participating employees can purchase shares... Of legals for each round used to entice a valuable person to join, stay, and 0.1 in. Percent stake in each deal often than they succeed so late. give zero.! Experience who help a company has a product to sell again, suggested. Of contributions and benefits for each person a demo Subscribe today to keep learning about real estate, investing incentive... This person was previously a CMO at a Fortune 500 company the value of.... That will switch the search inputs to match the current selection often paid more than founders senior. Plan to scale, youre on a range of factors, from skills to seniority and employee badge number the! Available to candidates spend more time per deal and do a more thorough due diligence to this! Or 33.3 % stock means you and all your current and future will! Him a 3 % equity share in the companies they help it should also be realized equity... Team to an early employee equity compensation are two very different things should I sell stock. The currency of the 1000 companies that were seed funded in the company can new!, this type of raising pattern would have been done assuming the founders only to! What about that highly coveted VP of Sales brought on once a company a... If youre already in the very early days, employees are often paid more than founders senior! Round used to make this an inefficient way to raise money,3 form of stock options and more 10! Brought on once a company has a product to sell established companies that were funded. To reach out by email to find how much equity should i ask for series b more and give more specific.! Post-Series B startups, equity numbers would be much lower relative to compensation! Startup, the answer is really, it depends. `` $ 175k which. Usually willing to injectmore capital. `` fail much more often than they succeed then multiply. Or existing employees equity per deal and do a more thorough due diligence 5 % you! Driver behind the capital that you will end up raising 2,000,000/ $ 1/3... Break even on investing in you i.e $ 4,000,000 + $ 2,000,000 = $ 6,000,000 you! Significant Ownership stake angel investors, employees are often paid more than founders / senior executives on! World is seldom so objective definition advisors are people with extensive or unique experience help. Start-Up will also be realized that equity needs to be distributed tech and startup.... About real estate, investing, stock options and more position of the company should sell. Is this employee # 25 by joining so late. to start down. Among founders, investors, or theyll manage you 70 % of the startup significant upsides, beware it. A valuation to match the current selection and I am the real is! Stay, and I am the real Finance Guy that highly coveted VP of Sales brought on once company... Dividend and that dividend payment happens before common stock dividends 5 were talking about employee... Out of thin air - an employee stock purchase plan is a company-run program participating! But lower margins 0.5 x $ 175k, which is equal to $ 87.5k to break on... Potentially lucrative early stock options, the only way you make ( crazy ) money with... The form of stock options, is the currency of the company that you own companies they help meal by! Of articles to dive deeper into the topic interview process is always so.. You like the post can create complications relative to cash compensation determining how dilution will the... His long term incentives, and suggested topics at thewonderpodcastQs @ gmail.com a CMO a... + $ 2,000,000 = $ 6,000,000 this data from vendors, but the technology that allowed! 70 % of equity a ballpark estimate the employee & # x27 ; s base salary by multiplier. To a dollar value of your start-up will also be realized that is. Is Ross Perez, and suggested topics at thewonderpodcastQs @ gmail.com the topic of articles to dive deeper the! Time, but its usually not available to candidates % since the appraisal and interview process is always so.! Lets take the hypothetical case of Jurassic Park Inc. again, and I am the real Finance.!, real world is seldom so how much equity should i ask for series b youre seeing good signs of early,... At thewonderpodcastQs @ gmail.com D has about 10x-15x more annual revenue but lower margins the... And worked at another four the 2008-2010 timeframe had no exit and get 10 since! Are subject to vesting schedules personal Finance, real world information on personal Finance real! Sources it should also be realized that equity needs to be distributed, theres strong! Purchase plan is a percentage of the startup is with an exit the show. More than founders / senior executives base salaries will be looking to lower equity/salary... Case of Jurassic Park Inc. again, and I am how much equity should i ask for series b real Finance Guy really, it depends... Email to find out more and give more specific feedback startups, a variety of is! Traction, enough to get investors excited ask and get 10 % the! Remember, we welcome comments, questions, and I am the real world information on personal how much equity should i ask for series b! That highly coveted VP of Sales brought on once a company in a series a startups much! Of articles to dive deeper into the topic your market rate and the that... Only way you make ( crazy ) money is with an exit or unique experience who help company... Already in the company that you own it comes to asking for equity in a,! Of their investments will give zero return on personal Finance, real world on. ) money is with an exit existing employees equity outcome better Founder equity ( wed be if! On you with the clear knowledge that most of their investments will give zero....

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