Equity Distribution in Technology Startups

Equity distribution in technology startups is a critical aspect of company formation and growth. It involves allocating percentages of ownership to various stakeholders based on their contributions and roles within the company. This article outlines common equity allocations and discusses the complexities and considerations involved in setting these allocations.

Typical Equity Breakdown for Startups with Series A Funding

For startups that have raised a Series A round, the equity is often allocated based on the roles and responsibilities of the team members. Here is a range of common equity percentages for various positions:

Title Range

CEO 5 – 10% COO 2 – 5% VP 1 – 2% Independent Board Member 1% Director 0.4 – 1.25% Lead Engineer 0.5 – 1% 5 years experience Engineer 0.33 – 0.66% Manager or Junior Engineer 0.2 – 0.33%

Equity for Early Stage Startups without Money

For early-stage startups without external funding, everything is up for negotiation. It is important to ensure that the early partners are adequately incentivized to work hard, without paying them initially. In these cases, the early partners should have a significant portion of their compensation structured as equity.

Setting Aside Equity for Investors Before Series A

Until a startup raises its first institutional round of funding, it is generally not advisable to set aside a large amount of equity for investors. This is because it is difficult to accurately predict how much equity the institutional investors will ultimately want for their investment. Instead, the startup will issue new shares to the VCs during the Series A round.

However, some startups may decide to set aside a small percentage of equity (~5%) for family/friends/angel investors that are willing to provide sufficient capital to warrant the issuance of equity. Alternatively, they can issue convertible notes to raise smaller amounts of capital.

Issuing equity is relatively expensive, as per legal advice, and it is not recommended for raising a few thousand dollars. For such scenarios, issuing convertible notes is a preferred method since they are less costly.

Equity Dilution and the Increasing Pie

With each subsequent investment, the founders' equity share will decrease due to the dilution of the equity. However, since the overall pie (the total company value) is expected to grow, the absolute value of the founders' equity stake may increase. Therefore, it is important not to get too caught up in the exact percentages, as these can fluctuate significantly.

There is no one-size-fits-all figure for equity distribution. Each startup has unique circumstances and an equity structure that reflects those circumstances. Regularly reviewing and adjusting the equity distribution ensures that the company remains aligned with its goals and the contributions of its key stakeholders.