How Much Startup Equity Should You Get?

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Last Updated on February 26, 2024 by Ashish

Introduction

Startup equity is an important concept for founders to understand, as it determines the ownership and control of the company. In a startup, equity is typically distributed among the founders, employees, and investors as a way to compensate for their contributions and to incentivize their involvement in the company.

However determining how much startup equity to receive can be a complex and nuanced process. It involves balancing the needs and expectations of all stakeholders, as well as considering the stage of the company, the role and responsibilities of the founder, and the level of risk involved.

In this blog post, we will delve into the factors that founders should consider when determining their startup equity, as well as the common equity structures used in startups and how to effectively negotiate equity with co-founders and investors.

Factors to consider when determining startup equity

There are several factors that founders should consider when determining how much equity they should receive in a startup. These include:

How Much Startup Equity Should You Get?

The stage of the company

The amount of equity that a founder receives may depend on the stage of the company. For example, a founder who is involved in the early stages of a startup may receive a larger percentage of equity than a founder who joins the company at a later stage.

The role and responsibilities of the founder

The equity a founder receives may also depend on their role and responsibilities within the company. For example, a founder who is heavily involved in the day-to-day operations of the company may receive a larger percentage of equity than a founder who has a more advisory role.

The level of risk involved

The equity a founder receives may also be influenced by the level of risk they are taking on. For example, a founder who is quitting their full-time job to work on the startup full-time may receive a larger percentage of equity than a founder who is working on the startup part-time while maintaining their current job.

It’s important to keep in mind that these factors are not set in stone and can vary depending on the specific circumstances of the startup. It’s also important to remember that equity is not the only form of compensation that founders can receive; they can also negotiate salary, bonuses, and other perks.

Finally, it’s worth noting that determining startup equity can be a complex and nuanced process, and it’s often a good idea for founders to seek the advice of a lawyer or financial advisor. This can help ensure that the equity distribution is fair and aligns with the long-term goals of the company.

Common equity structures in startups

There are several types of equity structures that are commonly used in startups. These include:

Common stock

Common stock is the most common type of equity in a startup. It represents ownership in the company and entitles the holder to a share of the profits and voting rights at shareholder meetings. Common stock is usually issued to founders, employees, and investors.

Preferred stock

Preferred stock is a type of equity that has certain privileges or preferences over common stock. For example, preferred stockholders may receive a higher dividend or have priority over common stockholders in the event that the company is liquidated. Preferred stock is typically issued to investors and may have a higher valuation than common stock.

Options

Options are the right to purchase a certain number of shares of stock at a fixed price at a later date. They are often issued to employees as a form of compensation and can be a good way to incentivize and retain talent. There are two main types of options: incentive stock options (ISOs) and non-qualified stock options (NSOs). ISOs have favorable tax treatment but are subject to certain restrictions, while NSOs are more flexible but have less favorable tax treatment.

It’s important for founders to understand the key differences between these types of equity and to choose the one that best aligns with their goals and the needs of the company. Factors to consider when deciding which type of equity to issue include the stage of the company, the intended recipient of the equity (e.g. founders, employees, investors), and the company’s financial needs and goals.

How Much Startup Equity Should You Get?

How to negotiate startup equity?

Negotiating startup equity can be a complex and sensitive process, as it involves balancing the needs and expectations of all stakeholders. Here are a few tips and strategies to keep in mind when negotiating equity:

Understand the company’s financials and valuations

It’s important for founders to have a clear understanding of the company’s financials and valuations, as this will help them determine a fair and reasonable amount of equity to request. This may involve reviewing financial statements, analyzing market trends and benchmarks, and seeking the advice of a financial advisor.

Be clear about your contributions and value to the company

Founders should be clear and concise about the specific contributions and value they bring to the company. This may include things like their expertise, experience, and time commitment to the company. Being able to clearly communicate your value to the company can help you negotiate a more favorable equity package.

Seek the advice of a lawyer or financial advisor

It can be helpful to seek the advice of a lawyer or financial advisor when negotiating equity, as they can provide guidance on legal and financial considerations. This can help ensure that the equity distribution is fair and aligns with the long-term goals of the company.

Be transparent and fair

It’s important to be transparent and fair when negotiating equity with co-founders and investors. This means being open and honest about the company’s financials and valuations and being willing to compromise and find mutually beneficial solutions.

By following these tips and strategies, founders can effectively negotiate their startup equity and ensure that it aligns with the needs and goals of the company.

Conclusion

Startup equity is a complex and nuanced topic that is critical for founders to understand. It determines the ownership and control of the company and is typically distributed among the founders, employees, and investors as a way to compensate for their contributions and to incentivize their involvement in the company.

There are several factors that founders should consider when determining how much equity they should receive, including the stage of the company, the role and responsibilities of the founder, and the level of risk involved. There are also several common equity structures used in startups, including common stock, preferred stock, and options, each with its own set of benefits and drawbacks.

Finally, it’s important for founders to effectively negotiate their startup equity, by understanding the company’s financials and valuations, being clear about their own contributions and value to the company, and seeking the advice of a lawyer or financial advisor. By doing so, founders can ensure that their equity aligns with the needs and goals of the company and all stakeholders.

We hope this blog post has provided a helpful overview of the topic of startup equity. If you have any further questions or need more guidance, don’t hesitate to reach out.