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Equity for Early Employees in Early Stage Startups

SoCal CTO

I was asked by a reader how much equity he should give out to early employees and to service providers in a very early stage startup. Founders vs. Early Employees To help with this discussion, let me start with a definition of "early employee."

How does equity dilution work for startups?

Gust

Equity dilution works when the same pie is divided among more people. Because the total percentage of equity will always equal exactly 100%, every time anyone gets another piece, by definition it “dilutes” all of the previous equity holders.

The two reasons early stage investors should be active investors

The Equity Kicker

Transparency provided by the internet makes this true at all stages, but it’s especially true at the earliest stages where capital requirements have declined precipitously.

The Truth About Early Stage Pre-Money Valuations

Ask the Angels

I think there are three fundamental truths regarding the valuation of early stage businesses by potential investors: The first is that a pre-money valuation is ultimately an outcome of negotiation , rather than a mathematical calculation of discounted cash flow or any other metric of potential company performance. For an early stage investor, due diligence is undertaken to refine initial impressions of factors affecting investment risk and return. By Al Schneider.

The Dilution Concern for Founders

Recent Buzzes - VC Experts, Inc.

There are three phenomena that trivialize even the best of investment strategies: Dilution, Dilution, Dilution.". The problem is, of course, dilution. Dilution - Dilution - Dilution. By Joseph W.

The State of Early Stage in March 2014

Dshen

They wanted me to talk to them about the state of startup investing, and I chose to present on the state of early stage investing, the area where I do most of my work. The going rate for seed stage startups is generally $5-6M cap on a note, or pre-money, with jumps up to $8-12M. In the section entitled, "Re-jiggering of deal stages and sizes", he states: Seed is not the first round of financing any more. The 21% didn''t raise any more money and you were not diluted.

What Are Pre-Seed Rounds and Why Do They Exist?

View from Seed

It’s become increasingly common for startups to raise several seed rounds, and this has led to a bifurcation in the seed stage between what are known as “pre-seed” (or “genesis”) and institutional seed rounds. The proliferation of seed-stage investors.

Quick Post on Post-Money Valuations

Rob Go

When I first started out as a VC nearly 9 years ago, most early stage company valuations were expressed as pre-money valuations. Today, nearly all early stage term sheets I see are expressed as post-money valuations.

Early stage boards work for stock options, not cash.

Berkonomics

Many early stage CEOs and board members have asked for some guidance regarding pay and time commitments for board members. Pay early stage board members of companies that are not lifestyle businesses one percent of the fully diluted equity in the form of an option that vests over four years of service. For lifestyle companies or later stage companies, board members should be paid on a per-meeting basis in cash.

Reserves

A VC : Venture Capital and Technology

They all are important at various stages of development. That means they will invest enough capital to avoid being diluted by the follow-on financing round. We know that early stage companies require a fair amount of capital to grow into profitable sustainable businesses and we work hard to make sure that we have the staying power that our portfolio companies require from us. That hurts them because they get diluted by those rounds they can’t participate in.

Anatomy of a Term Sheet: Conversion and Anti-dilution

VC Ready Blog

NOTE: This is the sixth post in our series about standard terms in early stage equity financings. Anti-dilution Provisions. While the timing of conversion is not a very hot topic in negotiating a term sheet, the anti-dilution provision can be if the investors decide to play hardball. These adjustments are referred to as “price-based” anti-dilution protection. The anti-dilution protection provisions can, therefore, have a significant economic impact.

How to Configure Your Startup Team

Both Sides of the Table

I am fond of quoting that about 70% of my investment decision of an early-stage company is the team. it’s the most expensive dilution you’ll ever face. Don’t listen to VCs who tell you to bring in the big guns early.

Top 100 venture VC investments each year average $100-150m gain

The Equity Kicker

One way of creating $100-150m is to invest early, take a lot of risk to get a meaningful stake and hope to get a massive multiple on a small investment. The dangerous thing for early stage investors is dilution by later stage investors.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

In the old days there usually weren’t convertible notes on early-stage deals and there weren’t party rounds with 20 angels or 6 seed funds. So how DOES a VC think about financings at early stages? When you do, my 20% becomes 15% and thus my true price for your round is actually higher than it appears when I invested because I already know I’m going to face more dilution for options. Then you’ll willing to take more dilution for them.

Smart Entrepreneurs Build Startups Without Investors

Startup Professionals Musings

The media tends to highlight experienced entrepreneurs who succeed with early new venture funding, like Uber’s Garrett Camp , but fail to point out the more common bootstrapping successes. Don’t let early funding increase risk and dilute your potential.

A Look At Seed Funding Options for Your Startup

Early Growth Financial Services

Our Seed Funding Your Startup webinar with Kristine di Bacco, Associate Attorney at Fenwick & West and Sirk Roh, EGFS’ Chief Operating Officer, was a dive into the ins and outs of early-stage financing and a look at some of the key vehicles. Among the earliest decisions you have to make when you’re getting your startup off the ground is how to fund it.

Value Inflection Points for Seed-Stage Startups

View from Seed

An easy way to think about it is that value over time doesn’t go up and to the right in a straight line like this: Instead, it’s more of a stair step like this: So, what are the value inflection points that create the stair steps, and how does one think about it at the earliest stages?

The Trend Back Towards Smaller Seed Rounds

Rob Go

Actually, the average in the first half of the fund was quite a bit lower, but during this period (2011–2014) there was a pretty dramatic rise in seed stage valuations overall. As a result, the average round size increased meaningfully for the seed stage segment overall. $3M

The Silliness Of Recapping Seed Rounds

Feld Thoughts

Assuming equity is raised at or above that cap, the total dilution, before the new money, is 16.6% (equivalent to an equity financing of $1m at a $6m post money valuation. But instead of adding it on to the note or doing an equity round with a price, which could still be an early stage price but below the cap, they make the argument that since the company couldn’t raise a round, the company is worthless. Here’s the scenario.

Are You Getting Your Fair Share Of Startup Equity?

Startup Professionals Musings

The next default of waiting until later is equally bad, since partners who bow out early will still expect an equal share of that first billion you make later. Of course, all co-founders need to remember that allocated percentages will be diluted as Angel and VC investors are brought in.

How Much Founder Stock Should You Offer Co-Founders?

Startup Professionals Musings

The next default of waiting until later is equally bad, since partners who bow out early will still expect an equal share of that first billion you make later. Keep your wits about you to make sure that dilution is done equitably and evenly.

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What Is Venture Debt and How Should Startups Use It?

View from Seed

NVV: What stage of growth is appropriate for a company to have achieved prior to taking on venture debt? NVV: Let’s talk about the seed stage specifically. NVV: Is there any dilution?

Equity 112

Super Angels Are A Boon To Startups Needing Funding

Startup Professionals Musings

What characterizes them is the number of companies they invest in, as well as the size of their investments (less than $250,000), and the seed or startup stage where they specialize. This can cause early investor dilution, lower ultimate returns or leave the startup stranded.

The Care and Feeding of Startup Advisory Boards

Seed Stage Capital

This is an often-overlooked, under-utilized, or completely neglected strategy for early stage companies. Ideally, they tap their network and provide leads for funding sources, early customers or partners, and key hires.

The What & Why of Hiring a Great Startup COO

View from Seed

For most of my career, I’ve served startups and early-stage companies as an operating executive or advisor. The savvier founders recognize early what skill sets they lack and the criticality of these skills towards ensuring success.

Hiring 155

Building a High-Tech Startup Team

Business Plan Blog

This is true for early stage funding as well as venture capital funding. Having too many co-founders will only lead to your eventual dilution. You shouldn’t hire a senior executive from an established company for an early stage startup. Early Stage.

Avoid New Venture Shortcuts That Scare Away Investors

Startup Professionals Musings

Getting investors to trust you with their money is always a challenge, and it’s even more difficult in the early stages, where you don’t have a significant revenue stream, a few customers, or maybe even a product yet.

The Truth About Convertible Debt at Startups and The Hidden Terms You Didn’t Understand

Both Sides of the Table

” And some seed stage investors told me, “I prefer not to fight over price now. In fact, most early investor work hard to help their startups get to the next level so it makes no sense for the angel investor and founders to be at odds.

7 Criteria To Help Startups Find The Right Investor

Startup Professionals Musings

Angels are more likely to fund new entrepreneurs, and early-stage or seed rounds, while VCs tend to focus on entrepreneurs with a successful track record, and later stage rounds. In all cases, investors tend to invest in people, more than the idea, or even the stage of execution.

Always have 18 months of cash in the bank

Chris Dixon

It’s true that following the 18 month rule can be extra dilutive. The question of when to raise money is one of the few times that entrepreneurs and early-stage investors have somewhat divergent economic interests. I was once told by an experienced entrepreneur (I can’t remember who) to always have at least 18 months of cash in the bank.

Dealing With a Tough Market

Rob Go

For early stage companies and for our new investment activity: I’m very bullish. But on balance, I think you’d rather be a seed stage company building from the beginning in a softer market than in a really hot market.

How Smart Entrepreneurs Select VC / Angel Investors

Startup Professionals Musings

Angels are more likely to fund new entrepreneurs, and early-stage or seed rounds, while VCs tend to focus on entrepreneurs with a successful track record, and later stage rounds. In all cases, investors tend to invest in people, more than the idea, or even the stage of execution.

What is the Definition of a Seed Round or an A Round?

Both Sides of the Table

There weren’t a lot of seed funds in 2007 so this was often done by angels, funding consortia or sometimes early-stage funds that existed then (First Round Capital, True Ventures, SoftTech VC, etc.). They want to be early.

Kryptonite Angel Round Terms

The Startup Lawyer

Here’s a list of the top 5 deal terms that cause harm to startups at the seed financing stage and therefore should be avoided: 5. Whatever the form of control, seed investment is way too early to be even thinking about losing any amount of control of your startup. This is something you might see in a late stage private equity financing with a company that has a history of generating revenue. It does not belong in any early stage deal. Non-Dilution.

One of the Biggest Mistakes Enterprise Startups Make

Both Sides of the Table

If you’re an early-stage enterprise startup services revenue is exactly what you need. The most important way to sell a product for an early-stage business (or frankly any stage) is to have strong referenceable customers. But while you’re early?

Sizing Option Pools In Connection With Financings

A VC : Venture Capital and Technology

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. But early on in a company, you will need to and want to be more generous. And if you do it that way, you will end up with a lot less dilution. We've talked about this issue before here at AVC.

Your LTV Math is Wrong

Seeing Both Sides

The problem is that many early-stage companies have no idea what their average, long-term churn rate really is because they are simply too young. Thus, the cost of capital for a start-up (and the dilution a founder faces in exchange for that capital) is very high.

8 Tips On How Much Money To Ask For From Investors

Startup Professionals Musings

If your company is early stage and has a valuation under $1M, don’t ask for a $5M investment. Company stage. Angels might be interested during “early stage” if you have a prototype, but VCs won’t bite until you have a product, customers, and revenue.

Crossing the Chasm is a Major Startup Challenge

Startup Professionals Musings

In fact, it’s all about the “focus” required to get early stage technology products across the deadly chasm from early adopters to mainstream customers. Everyone in the business world has heard of the old bestseller by Geoffrey A.

Equity is the currency of early stage businesses.

Berkonomics

Equity is the currency of early stage businesses. The truth of this statement may be obvious, but the execution of a good incentive program using equity is often mismanaged, damaging the corporate capitalization structure and even affecting the outcome of subsequent investment into the company. First, a brand new enterprise is often formed from the efforts of several “partners”, each with an expertise valued by the others.