Startup Equity Agreement For Executives In Chicago
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Equity agreements allow entrepreneurs to secure funding for their start-up by giving up a portion of ownership of their company to investors. In short, these arrangements typically involve investors providing capital in exchange for shares of stock which they will hold and potentially sell in the future for a profit.
For early-stage startups, equity tends to be higher, around 1.5% to 3%, to compensate for higher risk. On the other hand, for more established companies, the range is usually 0.5% to 1.5%. This allocation ensures the VP of Sales is motivated and aligned with the company's long-term goals.
Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.
When you draft an employment contract that includes equity incentives, you need to ensure you do the following: Define the equity package. Outline the type of equity, and the number of the shares or options (if relevant). Set out the vesting conditions. Clarify rights, responsibilities, and buyout clauses.
Equity agreements commonly contain the following components: Equity program. This section outlines the details of the investment plan, including its purpose, conditions, and objectives. It also serves as a statement of intention to create a legal relationship between both parties.
The general thinking is that, before Series A, founders should retain a total of 50 to 70% ownership.
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).
Regarding the share size, pre-IPO companies that hire CEOs externally typically offer 5% to 12% of the company's fully diluted outstanding shares, while Founder CEOs holdings depend on the value and number of funding rounds and can range from 15% to 75% or more of the company.
In summary, aim for 1% to 5% equity, considering your role and the startup's potential. Ensure you have a clear vesting agreement, and don't hesitate to negotiate based on your contributions and the lack of salary.
In summary, 1% equity can be a good offer if the startup has strong potential, your role is significant, and the overall compensation package is competitive. However, it could also be seen as low depending on the context. It's essential to assess all these factors before making a decision.
