That percentage is dictated by factors like timing, degree of contribution, level of commitment, and the company's valuation at the time of equity distribution. Founders generally — and unsurprisingly — receive the most initial equity. The company's earliest investors also tend to receive more equity than those who get on board later, as their investments are proportionately larger relative to the company's early valuation. And employees who help get things off the ground also often see larger proportions of ownership than those who join the company further down the line.
Equity distribution is also closely linked to funding stages. As funding rounds progress, your financial circumstances naturally shift, and in virtually every case, how you distribute equity shifts with them. As we touched on earlier, startup equity distribution varies based on factors — including timing, business model, industry, CEO preferences, and number of stakeholders involved. There's no definitive, "this the only way this happens" model for the process.
Still, there are some trends and relatively consistent figures that characterize a typical startup's equity distribution. Here's a look at how equity distribution often progresses as a startup scales and moves through funding stages. Image Source: Gust. As you can see, startup equity is relatively fluid and can shift pretty radically as a company scales.
And for anyone involved with a growing startup — in any capacity — knowing the value of your personal equity is key. Here's a look at how you can calculate that.
The last preferred price is what investors paid for a single share during the company's most recent funding round. It's typically used as a reference point for the degree of a startup's potential success.
A startup's post-money valuation represents the broader value of a company after a round of funding. It's calculated by adding the pre-money valuation — a company's valuation before a round of investment — and the amount of new equity. Hypothetical exit value is the value a company would exit at — meaning the value that a company would generate should it be sold.
Startups typically don't readily offer this information. If you want to find a somewhat accurate figure, you should research similar companies to see what theirs have looked like.
This one is pretty self-explanatory. The number of options in your grant is literally the number of options in your grant. Once you have this information — a lot of which you should be able to find in your offer letter — use this handy calculator from Carta to determine the value of your potential equity. Equity awards, regardless of their form, are subject to vesting schedules.
As a result, longer vesting schedules are becoming more commonplace. The growing time it takes companies to go public or be acquired is also affecting other stock option terms. Typically, employees have had up to 90 days after leaving a company to exercise their options, which can be costly and come with a large tax bill.
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. Currier, the serial entrepreneur turned venture capitalist, says he typically offered between.
So you pay them all. Giving out equity may feel painless. How much should an early-hire engineer expect in equity compensation from a startup? Buy it now for lifetime access to expert knowledge, including future updates. Related sections. Stages of a Startup. Why Negotiation Matters. Offers From Startups. In a pre-seed funding startup, employees are taking more of a risk than if they were to take a job at a more stable and established business.
This risk has to be factored into the remuneration package being offered. It has to be attractive enough to bring in the talent needed to do the early-stage foundational work, that will make your startup a success.
Before series A funding, startups can afford to be generous to attract the right people. It depends on the nature of the startup and the value that the individual brings to the startup. Imagine for example a startup that has plateaued and requires a technical expert to join them to drive a solution and move the company into growth, in this circumstance the right engineer is in a strong position to negotiate a large equity share.
There are nuances to equity awards and there are too many to consider in this blog. In broad terms you can consider average equity at series A funding to be:. These equity grants are based on the expected value that these people bring to the business. At the most senior levels, there is an expectation that the reward package will include a significant equity stake.
As your startup grows there will inevitably have to be a move away from individual equity grants and a decision made on whether all employees will be given access to the scheme. If so, the scheme will have to become generalised and rigid as opposed to the bespoke and flexible grants given early on. From series B funding onwards the equity awards if offered to employees at this point will be much smaller, in part because salaries can expect to increase as revenue grows.
At this point, any awards may also be based on the seniority and performance of employees. As your business moves through the growth cycle and into series C funding any EMI will now be an established scheme with fixed rules. Often companies will organise themselves into stratifications and make this available to employees so that the scheme is transparent. For example, the seniority of employees may be broken up into Senior, Mid-Level and Junior.
Each of these tranches will attract different levels of equity. The company may also be stratified into functions so that engineering and marketing departments also have different equity levels. For example:.
As with all strategic business decisions, there are several factors to consider when awarding equity to employees.
There are a number of different approaches to calculating equity awards. Fred Wilson advocates for this formula and it has several steps. Firstly, you need to know the value of your startup. This is the value of the entire enterprise that you would sell for today, this might be the value at the last funding for example.
You also need to know how many outstanding shares there are for your startup. Second, similar to the description in the section above, you organise your company into brackets.
The top-level management team in the top bracket, and the lowest level, non-key function employees in the bottom bracket. Each bracket is then assigned a multiplier, see example below.
There are no fixed benchmarks for these multipliers and rely on myriad factors unique to your startup. The next stage is to multiply the salary of individuals in these brackets to get a value for the equity grant. Once done, this is divided by the value of the company and multiplied by the number of shares outstanding, worked example below.
The second method associates the equity to the market rate salary for a specific role in the start-up. Simply put, start-ups are able to recruit talent by offering a reward package that equals the market rate.
The start-up can do this as the package is made up of a salary plus equity. If relying on a cash salary alone, the start-up would not be able to compete in the market and would not be able to recruit the required talent. The difference is made up of equity shares. Calculated using the value of the company and the total number of outstanding shares.
These methods are a useful tool in order to explore the levels of equity different parts of your organisation might expect.
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