Startup advisor shares: How much equity should you give your advisor?
Startups commonly give 1% equity to General Advisors paid only in equity, who work less than 2 days a month. Discover m...
Starting a company is a fine balance of risk and reward. You’ve probably left a salaried job, and are using your savings to start building your vision. After bootstrapping your business to this point, you raise money to accelerate growth and development.
Bootstrapping founders often don’t pay themselves a salary. But what happens when you’ve raised funding and there’s cash in your business account? And how are founder shares fairly distributed to make sure founders and early investors are aligned?
To find out, we’ve run the numbers. We’ve used data from hundreds of UK funding rounds on SeedLegals, and with around 50% of our users raising their first and second funding rounds, we’re sharing this exciting snapshot into early-stage funding deal terms.
Here’s what’s being agreed behind the scenes in the negotiations for these early but crucial first investments.
During term sheet negotiations, founders and investors agree how much the founders will be compensated.
Usually founders receive shares and most founders also receive a salary. When the company pays founders a salary, this means the founders won’t need to moonlight (have another job on the side) and can stay focused on growing the business.
On the other hand, if the founders don’t take a salary, the extra money could go a long way to growing the business in the early stages.
This is what our users are deciding in their first funding rounds:
Our data shows that the decision to take a salary very much depends on the size of the round.
For rounds of £150,000 or below, around half of founders secure a salary.
This proportion increases for round sizes between £150,000 and £1 million, with three quarters successfully negotiating a salary. Interestingly, this proportion remains consistent above £150,000, whether the round size is £200,000 or approaching £1 million.
When it’s agreed that the founder will earn a salary, we’ve uncovered that the amount significantly correlates with the valuation of the company. You could try using our results to predict your own salary! (Or for investors, the founders salaries).
Quick summary: for every £100,000 increase in valuation, the founder salary tends to increase by roughly £1,300 per year.
Another key point in term sheet negotiations is the question of how much equity the founder still owns after the investment, and the conditions those shares are subject to. After all, it’s in the investors’ interest to make sure that founders stay with the company, and don’t walk away with a sizable chunk of the equity, rendering the company essentially uninvestible for future rounds.
On the other side of the table however, founders have worked hard to build their company from the ground up. The question of ownership is a hotly debated issue. A common way to satisfy both parties is to use founder share vesting, where both founders and investors agree that part or all of the founder(s) shares are withheld for a certain amount of time after the investment.
The ‘vesting period’ is the length of time it’s agreed that the founder(s) needs to stay with the company for their shares to be fully returned to them.
So how common is founder share vesting in early stage rounds? For pre-series A deals, our data shows that two thirds of deals include founder share vesting in the term sheet, with the majority of those agreeing to a three-year vesting period.
Interestingly, we also found that the inclusion of founder share vesting did not correlate with whether or not the founder will earn a salary after the investment.
During the vesting period, shares are returned to founders bit by bit, usually monthly or quarterly.
However sometimes companies build in a delay to the vesting schedule, known as a ‘cliff’, where the first tranche of shares is only released after an agreed amount of time. The cliff is designed to make sure founders are committed to staying in the company for at least the initial cliff period – if they left before this, they would leave without any shares vested.
Our data shows a third of funding rounds include a cliff period in vesting schedules. And of those with a vesting schedule, the vast majority opt to do the first share release at the 12 month mark.
The date at which the shares start to vest is also agreed in the term sheet. Vesting usually starts on the date the investment closes.
However our data shows that 40% of the time, founders and investors agree that the fairest start date is before the funding round, selecting either the date the founder joined the company, or the date that the company was incorporated.
Counter-intuitively, we also noticed that the earlier the date at which shares start to vest, the longer the vesting period. So, if you ask for your investor for your vesting to start earlier, expect them to push for a three or four year vesting period.
Our data also allows us to survey the startup scene for wider trends, and we thought we’d leave you with one that we think is particularly interesting. While solo founders account for a relatively high percentage of early stage funding rounds, it seems that investors might favour businesses with two founders over those with only one:
If you have any questions, or would like more help to calculate founder compensation for your own funding round, book a free call with one of our specialists.