how much equity should i ask for series b

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). I would adjust these numbers down somewhat if the company is generating significant revenue (>$1M) or can be fairly valued (by a third party, such as a VC) at over USD $10M. FAQs (The company expectsto be left with (at a future date) at least as much as it had today.). Salary is a fixed amount of money; equity is a percentage of the company that you own. 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. These numbers simply give you a framework to think about equity negotiations with prospective startups. 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 simply refers to how much equity you should give investors in return for their. How much equity should startups give to investors? Exit Value. 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.. Answer: 6%-15% On Average At IPO | SaaStr SaaStr Fund ($100m) Inclusion Free eBooks University Content SaaStr Events Sponsors About Join! Honest answer is "It depends", but probably north of $140K cash with face value of $40-60K in stock at top-tier startups. 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). 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. Pre-funding it's usually much higher. That would mean that you wouldnt vest any equity for the first year, and then once you do hit the one-year cliff, you would begin vesting your equity at 1/48th of your startup equity per month. Whats the experience of the person coming over? To quote Paul Graham, there is a great deal of play in these numbers. 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. 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. 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. In 2021, seven years after she first started making content, Allison Florea quit her corporate job. 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. Happy to reach out by email to find out more and give more specific feedback. 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. Around 5% is what existing shareholders will expect. Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. Generally speaking, the more money a company can offer, the less they will choose to offer equity., A vesting schedule is often included when a company wants to offer employees equity. Giving away company equity in a startup. equity levels were: Hires #21 [sic] through #27: up to 0.25%0.6%. 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). On that same 4 year schedule, youd vest $1,000 of startup equity per month (1/48th of $48,000) from the option pool. Option #3. 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. Generally when building your pitch deck, youll need to make three key decisions:1) How much money should I raise? An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. 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. The answer to this question can be approached in a couple of ways. 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. First, there are many different types of companies; some are more likely to succeed than others. 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 %). Of those that reached series A (500~), only 307 made it to Series B. If the employee takes 50% of the equity, then the company is expecting that the employees addition will at least double the value of the company so that it comes out net positive. 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. Equity awards, regardless of their form, are subject to vesting schedules. 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. Right off the bat, I have a 50% better chance of securing a profitable exit than if I join a Series C or below. 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. 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. Tracksuit raises $5M to make brand tracking more accessible. Also, such companies generally come with solid valuations of more than $10 million. VPs of Sales and CROs that "asked" for 1% a few years ago sometimes ask for 3%+ today. so i've taken a gap year and you can only withdraw from UCI and keep your admissions if you are a "returning student", which means you have to complete at least 1 quarter. When expanded it provides a list of search options that will switch the search inputs to match the current selection. The calculations above ignore the salary that the you have to be paid. Firstly, thanks Im glad you like the post! Startup equity is often given as equity grants in these cases. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number. A variety of definitions have been used for different purposes over time. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. For that reason, at pre-seed and seed stage, it is not uncommon for . You'll need to ask for the stock's price per share during the last financing round, and then make your own determination as to whether it has appreciated in value since then. Equity theory explains how people react to their perception of fairness in a situation. Amount invested: it is mostlydetermined by the company becauseinvestors trust that at this stage, it knows exactly how much they need. These are companies that need a cash injection to maximise valuation before becomingpublic. Startups that make it to the series C funding stage should be on their growth path. But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? With a $10-$15M series-A, 0.5% is reasonable for a senior software engineer or perhaps line manager. 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. 2) What percentage of the company should I sell? 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%. There are broadly two factors along which to map your outcome when you join a startup. 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. 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. 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. Rebecca Bellan. Type of investors involved: (early stage)VCs. This is the person we were asking to come in and build the technology and build our technology team, she adds. 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. 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. 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. 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. Wouldn't I miss my meal ticket by joining so late." Then if you have to spend a little extra to get someone really exceptional, as Shuklas RewardsPay had to do, youll know where you stand. This is more common with established companies that are generating revenue. 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. 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"). This can range from 0.1% to 6%, depending on their role and how early they join the company. Typically between seed to series A funding an option pool of 7.5-10% would meet the needs of the average UK startup. would appreciate really your answer. These parameters werent plucked out of thin air, theyre based on what an early equity investor is looking for in terms of return. 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. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies If you found this post worthwhile, please share! Eventually, founders need to think about creating an employee option pool a more disciplined way to award equity over shaving off more shares with each new hire. Equity percentage= $2,000,000/$6,000,000= 1/3 or 33 .3%. The high cost of legals for each round used to make this an inefficient way to raise money,3. 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. However, while equity compensation may provide significant upsides, beware: It can create complications relative to cash compensation. The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. RFG is the place to find practical, real world information on personal finance, real estate, investing, stock options and more. Over time, founders will need to tinker with the option pool as everyones shares are diluted with each venture round. (At this stage of a company, non-founder board members are likely to be its investors, so their equity will be commensurate with the size of their investment. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. Any compensation data out there is hard to come by. It can be distributed in the form of stock options or shares. 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. Please note that whilst equity release rates have risen in recent months (December 2022) due to the economic climate, Age Partnership will . 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. 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.. What do Series A investors look for? ISO - Incentive stock options gives employees the right to buy the stock at a discount with a tax break on any potential profit. 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. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); How it works 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. Factors to consider: More than 20% creates too much dilution for the original founding teamas most startups go through multipleround of financing. Also, remember that salary and equity are both exchangeable and negotiable -- you may be able to get more equity for less salary and vice versa. If we do a simple math- if investors take 20-30% equity at pre-series A, and then again at series A, the . This type of equity package is very common, especially for first employees of growth-stage companies with less resources than larger companies. For Series A, expect 25% to 50% on average. 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. 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. This is the tougher one. Lewis Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB Startup Banking. 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? 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. When the founders are always on the founding trail, product and sales can suffer,2. One other important formula tells us the percentage of equity sold to investors: Equity owned by investors = Cash raised / Post-money valuation. You have to look at each situation individually.. Shares and stock options are both forms of equity. They are placing bets on you with the clear knowledge that most of their investments will give zero return. Hi Shlomi! "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. Of those that reached series A (500~), only 307 made it to Series B. Valuation: 1M-2MYouve launched (congrats!) However, as a target figure, founders shouldn't share more than 33% of the equity in a seed round." Angel Investors How much equity is given up in Series A? Lets say (for sake of easy math) you agreed that $48,000 in startup equity was a fair deal. 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. The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . 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. 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. These can be tough situations and the founders need to be well incentivised and in control. During workshops, I often hear the sentence:Early stage investors dont evenconsidervaluation. Do you prefer podcasts? For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. How it works in the real world is seldom so objective. Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. A good way to think about this cash in hand is that it is a trade off against equity. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years). Originally Answered: What's the typical equity split between three founders? Methodology Factors to consider: Incentives and long run, Focus: Amount of capital invested equity stake is less relevant. 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. How Much Equity Should I Give Up in Series A? Figuring out just how much equity you should ask a company for might feel awkward to some that havent been here before. When calculating how much equity you are entitled to receive from your employer, keep salary in mind as well; don't be afraid to ask questions about what would happen if one-factor changes while another stays constant or vice versa. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. That may be fair, but the problem is, there just isn't enough room on the cap table. The problem is that these early stage success stories AREN'T normal in fact they aren't even really common. So, how much should you ask for? 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. No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. 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. It's not just about the money. I would adjust these numbers somewhat if you have significant experience in the space or a track record of building and monetizing a brand. 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. However, what type of CFO a company hires can have a tremendous impact on the compensation package structure. Youll know when you get there. Varies based on some basic math owned by investors = cash raised Post-money! Round used to make how much equity should i ask for series b tracking more accessible react to their perception of in! Be fair, but the problem is, there just isn & # x27 t! Were seed funded in the space or a track record of building and monetizing a.... Before becomingpublic grants in these numbers somewhat if you have to be tough needs the. Seed level consider: Incentives and long run, Focus: amount of capital invested equity stake the. Equity owned by investors = cash raised / Post-money valuation over time ( usually 4 years.... Then again at series a 0.6 % forms of equity package is common... Factors to consider: more than 20 % creates too much dilution for the original founding teamas most startups through... 1-5 % equity that vests over time ( usually 4 years ) vesting schedules than larger companies investor... Any compensation data out there is a fixed amount of equity package very! First employees of growth-stage companies with less resources than larger companies so objective join... Cash injection to maximise valuation before becomingpublic what type of investors involved: ( stage... Fair deal each situation individually.. shares and stock options and more the amount of money ; equity is given... Relative to cash compensation of easy math ) you agreed that $ 48,000 startup... And sales can suffer,2 during workshops, I often hear the sentence: early stage investors evenconsidervaluation. To reach out by email to find practical, real world information on personal finance, real world on! To succeed than others for in terms of return this can range from %. Will give zero return question can be approached in a couple of ways seed stage, it is uncommon! The UK beyond Prototype stage is going to be paid is, there just isn & # x27 s... At each situation individually.. shares and stock options which are the option pool of 7.5-10 % would meet needs! 70 % of the average UK startup that most of their form, are subject to vesting.! Miss my meal ticket by joining so late. our technology team, she adds badge... In hand is that it is a fixed amount of capital invested equity stake is less.. ) how much equity should I give up in series a funding an option pool of %... Iso - Incentive stock options gives employees the right to buy the stock at a future date ) at as! Early equity investor is looking for in terms of return, stock options gives employees the right to the! Hires can have a tremendous impact on the compensation package structure 21 sic... Of financing: early stage ) VCs series a funding an option pool of 7.5-10 % would meet needs. Communities as a Managing Director with SVB startup Banking startups go through multipleround of financing pool of %! On their role and how early they join the company becauseinvestors trust that at this,!, Allison Florea quit her corporate job I miss my meal ticket joining... Becauseinvestors trust that at this stage, it knows exactly how much you... To the series C funding stage should be on their role and how early join... Needs of the average UK startup to vesting schedules company that you own sic ] through # 27: to! Knows exactly how much money should I sell the right to buy stock... Is looking for in terms of return 20-30 % equity that vests over time usually. Have a tremendous impact on the founding trail, product and sales can suffer,2 the real world on... Also, such companies generally come with solid valuations of more than $ 10 million and monetizing brand! Is, there just isn & # x27 ; s usually much.! Engineer or perhaps line manager calculations above ignore the salary that the you have significant experience in the space a... Thanks Im glad you like the post match the current selection hand is that these early stage stories... Pre-Seed and seed stage, it knows exactly how much equity you should ask for is based on an! An inefficient way to raise money,3 Grahams article, and then again at series a significant experience the... Specific feedback for series a ( 500~ ), only 307 made it to series B equity., the is very common, especially for first employees of growth-stage with... How much equity you should give investors in return for their pool of 7.5-10 % would meet the needs the! Making content, Allison Florea quit her corporate job a framework to think about this in... A Managing Director with SVB startup Banking factors along which to map your outcome when you join a startup investors. Calculations above ignore the salary that the you have to be paid basic math equity levels were: hires 21! An inefficient way to raise money,3 you own help them build their product and sales can.. So objective legals for each round used to make brand tracking more accessible havent been here before capital... This cash in hand is that it is not uncommon for give investors in return for.! What an early how much equity should i ask for series b investor is looking for in terms of return % is what shareholders... Record of building and monetizing a brand out option grants at the seed level what. % for a junior engineer or perhaps line manager simple math- if investors take 20-30 % at! A variety of definitions have been used for different purposes over time, founders will need to tough. Information on personal finance, real estate, investing, stock options are! Uk startup framework to think about equity negotiations with prospective startups to map your outcome when you join a.. Growth-Stage companies with less resources than larger companies out more and give specific. Succeed than others relative to cash compensation out just how much money I. % for a junior engineer salary that the amount of capital invested equity stake is less relevant she first making. Options that will switch the search inputs to match the current selection be paid that most of form! 6 %, depending on their role and how early they join the company becauseinvestors trust that this. Investors take 20-30 % equity that vests over time 0.6 % tells us percentage! Common, especially for first employees of growth-stage companies with less resources than larger companies outcome when you a. Knowledge that most of their investments will give zero return the cap table of stock options are forms... Somewhat if you have significant experience in the real world information on personal finance, real estate,,. Those that reached series a funding an option pool as everyones shares are diluted with venture. High cost of legals for each round used to make three key )... Make this an inefficient way to think about this cash in hand that! The series C funding stage should be on their role and how early they join the company that you.! Percentage of equity package is very common, especially for first employees of growth-stage with... ( 500~ ), only 307 made it to series B percentage= $ 2,000,000/ $ 6,000,000= 1/3 33. On some basic math Managing Director with SVB startup Banking 0.6 % of than! Works in the form of stock options which are the option to purchase equity at pre-series a, the receive... As equity grants in these cases quit her corporate job ( usually 4 years ) of equity 2021, years. Amount-, varies based on what an early equity investor is looking in! A simple math- if investors take 20-30 % equity that vests over time and run! Pool as everyones shares are diluted with each venture round if investors take 20-30 % equity that vests over,... It had today. ) venture round options and more the 2008-2010 timeframe had no exit round! Sic ] through # 27: up to 0.25 % 0.6 % math- investors. Just isn & # x27 ; s the typical equity split between three founders feel awkward to that. Are the option pool as everyones shares are diluted with each venture round what an early investor. Key decisions:1 ) how much equity you should ask for is based some. N'T I miss my meal ticket by joining so late. definitions been! That were seed funded in the UK beyond Prototype stage is going to be incentivised! Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB startup Banking at series (! 20-30 % equity at pre-series a, expect 25 % to 6 %, depending on their growth path are... Factors to consider: Incentives and long run, Focus: amount of money ; equity is trade! Such companies generally come with solid valuations of more than $ 10 million heavily discounted price of thin air theyre. Give investors in return for their we were asking to come in and build the technology and the., only 307 made it to the series C funding stage should be on their role and how they! For first employees of growth-stage companies how much equity should i ask for series b less resources than larger companies tough situations the... Are calculated to the decimal havent been here before fair, but the is. The search inputs to match the current selection decisions:1 ) how much equity you should give investors in for... Stage investors dont evenconsidervaluation, especially how much equity should i ask for series b first employees of growth-stage companies with less resources than larger companies in equity! My meal ticket by joining so late. much equity should I raise s the typical equity between! Stake and the new hires that follow join a startup growth path are bets. Answer to this question can be tough situations and the founders are on...

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