STARTUP Equity & Valuation
Ok you have made it this far, you have an idea, a prototype, a co-founder, a team (maybe) and so how do you decide/figure out/ formulate equity??
Being an early hire at a startup gives an individual the ability to make tremendous impact on an organization as it grows — and both the founders and those hires should know it. Of course, all of that assumes that the early employee does make an impact. — David Beisel
Equity: I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.
Vesting: The standard at startups is 4 years with a 1-year cliff. So you get 25% of your options after you’ve been there for a year, and 62.5% if you leave after 2.5 years. It’s possible that 4 years is now too short — companies are often worth more than they were 10 years ago, but they take longer to reach liquidity. I’ve seen some startups offer 5 or 6 year vesting schedules. To compensate for this, they offer above-market grants. ~Sam Altman http://blog.samaltman.com/employee-equity
Paul Graham — http://paulgraham.com/equity.html
Founders Institute https://fi.co/posts/885
Are you ready to be a STARTUP Founder/Employee? This is the ideal profile; Are you comfortable with:
- Chaos — startups are disorganized
- Uncertainty — startups never go per plan
- Resilient — at times you will fail — badly. How quickly will you recover?
- Agile — you may find the real opportunities for your company was somewhere else. Can you recognize and capitalize on them?
- Creative / Pattern Recognition — can you think “out of the box?” Or if not, can you recognize patterns others miss?
- Passionate — is the company/product/customers the most important thing in your life? 24/7?
- Tenacious — can you keep going when everyone else gives up? Can you keep giving 200% despite all the naysayers who don’t believe in your idea?
- Articulate — can you create a reality distortion field and have others see and share your vision and passion?
The Early Employee
If you’re a founder/co-founder all the attributes I mentioned above are needed in spades. However, if you want to join a startup as an early employee (say in the first 25 employees,) you can modify the list above.
You still need to be comfortable with chaos and uncertainty, but by this time the major risk of where the first round of funding is coming from is gone. However, you will be dealing with almost daily change, (new customer feedback/insights from a Customer Development process and technical roadblocks,) as the company searches for a repeatable and scalable business model. This means you still need to have a resilient personality, and be agile.
The more that those first employees feel like founders in terms of their ownership, emotional attachment, responsibility and overall understanding of the startup process (including financing, running day-to-day activities, etc.) the better the startup will be. — Ben Yoshovitz
Early stage employees are “self-starters” and show initiative rather than waiting for other people to tell them what to do or how to do it. (You may be wearing multiple hats in one-day.) You have to be passionate about your work, the company and its mission to be working 24/7. But more than likely you don’t need to be as articulate or creative as the founders (they’re doing the talking, while you’re doing the work.) And while you do need to be tenacious, you won’t need to be the last man standing if the ship goes down.
The Later Employee
If you want to join a startup as a later employee (say employee number 25–125, before the company is profitable) you can continue to modify the list above.
You still need to be comfortable with chaos and uncertainty. And you will be dealing with change, but it won’t be the constant daily change the early employees dealt with. By now the company may have found and settled on a repeatable business model. And at this stage of the company rather than everyone doing everything, actual departments may begin to form. However, job responsibilities and organizations will change regularly and you need to feel comfortable in embracing those changes and taking responsibility and ownership.
And you’ll still need to have a resilient and agile personality, as new customer and product opportunities will appear and change your work. But it won’t be happening daily. And while you still need to love what you do your passion doesn’t have to extend to tattooing the company’s logo on your arm.
The Adventure of a Lifetime
Take the time and think through who you are and what level of challenge you are looking for.
You’re not joining a big company. Startups are the adventure of a lifetime. But make sure it fits who you are.
(Source: Steve Blank https://steveblank.com/2009/06/11/am-i-founder-the-adventure-of-a-lifetime/)
How do you value a company? The ideal Valuation is based by the following criteria;
- Sound Idea (validated by experience or domain expert)
- Prototype (technology, algorithm, unique process)
- Quality Management Team (Execution)
- Strategic Relationships (Go-To-Market, Power of their Network)
- Product rollout or sales (Production)
- Market Size (TAM $25 Trillion | SAM $465 Billion)
This formula is a good way to think about equity and valuations. Use the additional resources to further help you develop a sound foundation! “If you can’t feed a team with two pizzas, it’s too large.” — Jeff Bezos, Amazon founder and CEO
Sources: Paul Graham, Sam Altman, Fred Wilson, Jon Zifcak, Steve Blank, Founders Institute, Brett Noyes
Prenups for Startups: How to Structure Founding Teams http://tech.co/prenups-startups-structure-founding-teams-2013-09
Co-Founder Equity Calculator http://foundrs.com/
How should equity be split between founders, (early) employees, consultants and investors when the company is bootstrapped? https://www.quora.com/How-should-equity-be-split-between-founders-early-employees-consultants-and-investors-when-the-company-is-bootstrapped
What founders need to know about startup Equity. https://creator.wework.com/personal-profiles/founders-need-know-startup-equity/