How Much Equity Should You Give Investors In Your Startup – Vazilegal Startup Library (2024)

FAQs

How much equity should a startup give an investor? ›

There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step. A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.

Up to this point, generally speaking, with teams of less than 12 people, the average granted equity for startup employees is 1%. This number can be as high as 2% for the first hires, and in some circ*mstances, the first hire(s) can be considered founders and their equity share could be even greater.

As a rule of thumb, a non-founder CEO joining an early-stage startup (that has been running less than a year) would receive 7-10% equity. Other C-level execs would receive 1-5% equity that vests over time (usually 4 years).

How Much Share to Give an Investor? An investor will generally require stock in your firm to stay with you until you sell it. However, you may not want to give up a portion of your business. Many advisors suggest that those just starting out should consider giving somewhere between 10 and 20% of ownership.

As a founder, it's important to have a clear idea of the value of your company and the value of an investment. Angel and venture capital investors are great, but they must not take more shares than you're willing to give up. On average, founders offer 10-20% of their equity during a seed round.

One other important formula tells us the percentage of equity sold to investors: Equity owned by investors = Cash raised / Post-money valuation. Given the above math, the amount of equity you will give up in a financing is ultimately a function of 1) the value of your company and 2) how much money you raise.

Typically, individual advisors can expect to receive anywhere between 0.25% to 5% - but the exact percentage ultimately depends on how much the advisor contributes to the company's growth, the advisor's expertise, and how much you're willing to give away!

Equal splits.

Whether they are 50-50, 33-33-33 and so on, equal splits remain the most common type of arrangement among startup founders. Dettmer, who has put together many hundreds of ownership deals for emerging companies, figures that just over half fall in that category.

This raises the question: how much should a COO equity grant be? Non-co-founder COOs (i.e. those hired at a later date) typically receive between 1 percent and 5 percent in business equity. Higher equity percentages are usually reserved for COOs who bring a lot to the table.

The general thinking is that, before Series A, founders should retain a total of 50 to 70% ownership. You can decide how much equity you'd like to keep and move forward from there, allocating out the remainder as it makes sense. With two or more co-founders, there are several approaches.

How much equity does the average startup founder get? ›

This research shows an average of about 28% founder dilution — almost 30% — from Seed round to Series A. Founder dilution from Series A to Series B is about 11%. By Series B, on average founders own less than 30% of the business while investors own more than 55%.

Startup companies might offer prospective employees different amounts or types of equity. Since most startups don't sell stocks to the public, there's no set price per share, meaning you can negotiate your shares amount.

Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.

As you clear each hurdle, the valuation of the company jumps and with it, the amount you can raise. A good rule of thumb is that at each stage, you can raise 10% — 20% of the valuation. If you try to raise more than that, investors become concerned with how much skin you have in the game.

The right investors can help your startup scale. And for those still in the ideation stages, an investor can mean the difference between your idea leaving the ground or never leaving your head.

Angel investors typically aim for a stake, ranging from 15% to 20% of the company. Sometimes the percentage can even go as high as 25%, however, it is important to understand that a higher stake doesn't necessarily equate to a higher chance of big returns.