Equity Percentages to Offer Investors at Different Stages

You might occasionally come across the sentiment that “early stage investors don’t really look at valuation.”

There’s some truth to it, in that they may not talk about it directly. However, one way or another, they have to consider valuation as a simple function of how much ownership of the company they secure relative to the amount of capital they contribute. Even if you are raising capital with a SAFE or Convertible Note, the terms are still an abstraction of valuation.

Invested capital, equity stake and valuation: how are they connected?

• Investment / Valuation [post-money] = Ownership percentage 
• Investment / Ownership percentage = [post-money] Valuation; depending on the investor, they may prioritise either a certain ownership percentage or a certain target valuation

Equity boundaries at different stages

Generally speaking, the average equity stake varies based on the stage of the startup. This is related to where capital is most crucial, and where the most significant milestones are achieved. For example, Seed and Series A are typically where founders take the most dilution, because the business has considerable risk but is also likely to need significantly more capital for developing the business than was required at Pre-Seed.

This will vary depending on the specifics of your business. Hardware companies, for example, usually need to raise more capital early on than software businesses. Software businesses may want to save that dilution for later rounds when they have a fully developed product and want to spend heavily on expansion.

1 | Introduction of a co-founder at early stages

This is usually the first time you will have to discuss equity ownership in your business, if you decide to bring on another co-founder early on. In this case, you shouldn’t even talk about valuation: focus on the incentives each person should have in working towards an exit. If it is below 5%, you should be concerned about how it might reflect on their motivation and long-term commitment to the startup. Outside of the typical range, it may be worth giving an additional co-founder a roughly equal stake to existing co-founders, depending on what they bring to the table.

Range: 5% – 20% 

Factors to consider: Incentives and long run

2 | First fundraising (“Pre-Seed”)

Type of investors involved: Angels

Focus: Capital required

Range: 10 % – 20%

Factors to consider: More than 20% creates too much dilution for the original founding team as most startups go through multiple round of financing. Excessive dilution can be a potential deal breaker for later investors as it looks like the founders may not maintain sufficient control of the business or enough motivation to ride out the bumps, although some businesses may simply require more capital up-front than others.

Negotiation in these cases is based roughly on today’s or the near-future valuation of the startup and is almost always raised on a convertible instrument, like a SAFE. It’s useful if these investors are networked in a way that can help you raise larger rounds later on, as well.

3 | Seed and Series A

Type of investors involved: Smaller VCs

Focus: Ownership percentage. Investors will typically have an ownership target in mind, and potentially a typical investment amount, so you will need to negotiate around that to ensure you get sufficient capital in return for a reasonable amount of equity. It is important that investors understand the logic behind the capital you are raising, and what it will help you achieve to grow the value of their investment.

Range: 15 % – 25%, average 20%

• Amount invested at Seed: $3.5M (median, US – Carta)
  
• Amount invested at Series A: $10M (median, US – Carta)

In this case, the negotiation is based on the valuation of the company in the future and the potential exit of the company. VCs want to have, in most cases, companies that can reach at least $100M turnover because they know that a billion dollars exit is feasible, which is how the fund mathematics works out for venture capital. If you can prove this kind of growth potential, then they are usually willing to inject more capital.

4 | Series B and Series C

Type of investors involved: later stage, growth VCs 

Focus: Valuation. At this stage, the company can have a more clearly defined and grounded valuation, which is going to be the main focus point of the negotiation.

Range: 10 % – 20%, average 15% 

• Amount invested Series B: $20M (median, US – Carta)
• Amount invested Series C: $30M (median, US – Carta)

Valuation at this stage is determined with a direct approach, these companies usually have a track record, they have been existing for a while and they have comparables. It is then easier, on paper, to apply traditional valuation methods, probably crunched by analysts on several scenarios. The number of deals reaching this stage is relatively little.  Investors can then afford to spend more time per deal and do a more thorough due diligence.

5 | Series D,E,F+

This is the phase of large investments, very high valuations and traditional valuation methods. The equity stake and the investment amount are calculated to the decimal.

Focus: Valuation

Range: 5% – 15%, average 10% .

• Amount invested Series D: $50M (median, US – Carta)

Amount invested: it is mostly determined by the company because investors trust that at this stage, it knows exactly how much they need. Thus, it is all about figuring out the valuation, determining how much equity they are going to get and if it is acceptable.

6 | Pre-IPO funding

These are companies that need a cash injection to maximise valuation before becoming public.

The mechanism is closer to bridge financing than straight up equity. These companies usually try to minimise the equity stake for the last investors.

Range: maximum 5%, since in most cases they’re going to offer quite a big part of stake on the public market (from 15 to 20, 25 %).