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How much equity should founders and employees really own per stage?
Capvisory is an independent, founder-led advisory boutique specializing in fundraising, sell-side M&A, and buy-side M&A for fast-growing tech companies and their investors.
Gründer und Partner
Gründer und Partner
We talk a lot to founders who plan to raise venture capital from institutional investors. One of the first questions we always ask is: “How much equity do the active founders and employees own in your company?”
The answers can be quite unexpected and can range from a mere 5% to a full 100%. One extreme example was last year when a founder wanted to raise on a €20M pre-money valuation. The problem was: just a few months earlier, he collected €2M (which is great) from family and friends at a €4M valuation, basically giving away 50% of his company.
The issue
Owning less than 85-80% at the pre-seed stage poses potential challenges for growth via the VC route. VCs need significant exits to deliver returns, and for significant exits, most companies need multiple rounds of funding, leading to multiple rounds of dilution. So if you start your first institutional round owning 50% or less, ending at 0.5% ownership at the time of exit, how much is your hunger to drive the business compared to another founder in this field who would end up with 10-15%?
So here is the disclaimer: The VC track isn’t the only path to success. Take Mailchimp, GoPro, Atlassian, or GitHub that didn’t go the traditional paths and still built billion-dollar companies. So yes, there are alternative paths to victory. However, many companies find VC funding crucial for scaling to the big leagues, as evidenced by the fact that 20-30% of U.S. IPOs are VC-backed. We always like to say: If you’re not building a rocketship, you potentially do not need the fuel to get it off the ground.
Understanding investor expectations
But when you’re ready to scale and need substantial financial fuel, investors have specific ownership expectations at each funding stage:
These numbers illustrate why ownership matters. Again – after all, if active team members only owned 0.5%, what motivation would they have to drive the company’s success?
The mess is already done? How to fix it?
If your cap table feels off-balance and you haven’t read this article early enough and now surprisingly figure out you ARE actually building a rocketship, consider these approaches to boost active ownership of founders and employees:
1. Buy back shares: Though potentially costly, active founders can repurchase shares from early investors.
2. Facilitate share purchases: Might be tricky but negotiate secondary deals with passive shareholders that are so attractive for new investors that the great majority of capital is still flowing directly into the company.
3.Consider Complete Recapitalization: This may involve issuing new shares or introducing a new class of shares to redesign the cap table, adapting it to meet future needs.
4. Issue Option Pools: This can dilute all shareholders but provides new incentives for the team.
Takeaway
Understanding how and why equity distribution matters will empower you to steer your company towards success, whether through the VC track or another pathway. Active ownership can drive motivation, innovation, and ultimately, growth.
To get more insights directly in your LinkedIn feed, follow Julius Krätschmer on LinkedIn.
Capvisory is an independent, founder-led advisory boutique specializing in fundraising, sell-side M&A, and buy-side M&A for fast-growing tech companies and their investors.
