Equity in a startup refers to the ownership stake an individual or entity holds in the company. The amount of equity one should ask for in a startup will depend on a variety of factors, including the stage of the startup, the role the individual will be playing in the company, and the level of investment being made.
At the early stages of a startup, equity is often used as a way to compensate for the high level of risk associated with investing in a new venture. As such, early employees and investors may be offered a larger percentage of ownership in the company in exchange for their contributions. However, as the company grows and becomes more established, the equity stakes may become smaller and more closely aligned with the amount of capital invested.
When determining how much equity to ask for, it is important to consider your role in the startup. If you are an early employee, you may be able to negotiate a larger equity stake as you will be playing a critical role in the company’s success. If you are joining the company at a later stage, your equity stake may be smaller, as the company’s growth and success will likely have already been established.
It is also important to consider the level of investment being made. If there are investors and they are investing a significant amount of money into the startup, you might not be able to negotiate a large equity stake. On the other hand, the startup is bootstrapped, your equity stake may be larger.
When it comes to determining the actual percentage of equity to ask for, there is no set rule, it’s all about negotiation. However, a common rule of thumb is to ask for between 1-10% equity for an early employee, less than 5% equity for a later stage employee. In general, startups in early stage have a pool of 10-20% stock options to distribute to early employees.
It’s also worth noting that equity can be diluted over time as the company raises more funding. Therefore, it is important to consider not only the percentage of equity being offered, but also the potential for dilution over time.
It is also important to consult with a lawyer or financial advisor before finalizing any equity agreements, as they can provide valuable guidance on the legal and financial implications of the equity being offered.
In summary, the amount of equity one should ask for in a startup will depend on a variety of factors, including the stage of the startup, the role the individual will be playing in the company, and the level of investment being made. It’s also worth considering the potential for dilution over time, and consulting with a lawyer or financial advisor before finalising any equity agreements.