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What percentage of the company’s equity do the employees and founders currently own? – This needs to be very clear
Here’s what they mean…
This is sort of the same thing as asking how large your ESOP is, but they are also asking how much the founders own so it’s a more holistic question of relative ownership.
Let’s skip the ESOP part for now. How much the founders own is really important, since investors want them to be motivated to make a lot of money. If the founders do not make money then the investors will not make money. Simple equation!
However, since there’ll be future rounds of investment, there will also be future rounds of dilution. Dilution means the founders own less. Investors know that a typical VC funded company may have 3-5 additional rounds of financing depending on what stage you are, so you can do simple math to see what the future will look like. If your cap table is fucked, then they may require a ‘recap’ to be done, which is where someone is going to be losing equity (ie early stage investors).
If after an angel round, the angels’ already own 40% then the founders have 60%. A successful company may have 5 rounds of dilution at about 10-20% per round. That 40% the angels got is bad news. I have seen seed stage investors tell the angels there is no deal happening unless there is a recap.
The other part is the amount staff own which is through an ESOP. VCs want there to be a large enough pool to attract and retain staff.
To answer this question (“What percentage of the company’s equity do the employees and founders currently own?”) You should read these to learn more:
- Founder Control and Value Creation in Startups don’t seem to be the same thing
- A meaningful founder exit is not the same thing for venture capital
What you need to say
“We have done two rounds of funding so far. We are doing our A now. The founders own 60% and the ESOP is 10%, of which 3% has been issued. Pretty standard.”
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