How much startup equity

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Written by Lestraundra Alfred writerlest. However, a lot of the beauty of being a business owner is in the lessons you learn and the adversity you overcome. So to help you with the process, we'll review what startup equity is, see how it works in a startup, go over how it's typically structured, and pin down how to value and distribute it. Startup equity refers to the degree of ownership stakeholders have of a company. This typically refers to the value of shares that founders, investors, and employees are issued.

As a founder, you want to make sure sharing ownership of your business is done thoughtfully and productively. And campy as it might seem, the easiest way to understand startup equity is to think of it as a pie.

There's only so much pie that can be divided and shared — and the value of each piece increases as your business becomes more successful. If you want your pie to become more valuable as a whole, you have to be willing to forfeit some pieces. Not too shabby. Startup equity, as a concept, rests on the idea that a company's stakeholders deserve exactly what that title entails — a stake in the company.

That generally means offering early contributors like employees and investors a certain percentage of ownership. 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. Four years is a common vesting schedule, with a one-year cliff. If any employee decides to leave the company and some of their shares have vested, they typically have ninety days after leaving the company to buy or exercise their stock options.

If they choose not to, they lose the stock options and their stock options are added back to the employee stock option pool. How much equity should a startup employee get? Some startups determine the amount of equity they grant to each employee based on the seniority of their role, while others offer equal amounts of equity regardless of hierarchy. Because a high percentage of startups fail at an early stage, early startup employees take on a significant risk when they join the company — and most businesses offer more equity to the earliest employees to reflect this fact.

Your cap table should include the total number of stock options that have already been exercised and the total number of shares still available in the option pool. As well as being a key financial document to share with potential investors, an up-to-date cap table will help inform strategic business decisions about the fundraising process.

While the existence of equity benefits is well known in the startup community, often founders are not well versed in the creation of equity benefit programs. By creating an ESOP, deciding on the type of equity to give, determining the vesting period, distributing the shares and documenting the distribution, founders can set up an effective equity program, thereby attracting the dedicated and hardworking employees that every startup needs.

This is a BETA experience. But probability weighting can help you determine the expected value of the equity that you started with. Considering the time between first receiving an equity grant and a future exit event can also help you assign some value to your percentage of equity shares. The present value of money, Stanton notes, is greater than the value of money in the future—especially when that future may not materialize.

And the amount of time between seed series A and series B helps to determine what the value of the shares might be. On average, it takes most startups seven to eight years to exit or reach a liquidity event—the point at which you can cash out or access the value of your equity. How will three rounds of investment affect that number? Considering dilution, probability of success, and time to exit together, the equity value in this example drops to somewhere around half a million dollars. Applying that rule—factoring in your dilution rate and the time it could take to see the money in the future—can give you a ballpark sense of what that equity might be worth.

Giving the reality of dilution and probability of failure, is joining a startup worth it? Quite possibly. Each time the startup raises outside funding, your percentage of equity is diluted. While the percentage of equity you own shrinks with each round of investment, having a small percentage of equity at a high valuation may offset the amount you were diluted. If so, by how much? Equally important is your belief in the vision. Named one of the "Best Entrepreneurs in the US," by Businessweek, Ghosh has led some most innovative tech-based companies in the US and advised hundreds of entrepreneurs.

Questions to Consider How long does is it going to take before an exit? How much capital is the firm going to need to raise? What is the probability of success or failure for this venture?