One of the many challenges for early-stage technology and science-driven companies revolves around compensation for founders. When a start-up is created, how do those there at the beginning get compensated? When there isn’t any cash in the bank yet, and there may be a period of time where products are in development, do founders get compensated, and if so, how? When angel investors seed the company, what happens then? Founders usually will get cash compensation, but perhaps not at the same levels as when the company later gets venture capital funding.
We were asked by one of our clients to help determine appropriate compensation parameters for an angel-funded enterprise. From this, there were clear norms that emerged–
Looking at a half-dozen angel-funded companies in the New England region (Boston, Massachusetts, New Hampshire), we assembled some data that helped inform the above mentioned principles.
Note that there are rarely more than 2 founders. Therefore, two can initially split the equity 50/50, and even with significant dilution, still end up with a meaningful equity stake after either angel, venture capital rounds, or both. If a higher number of co-founders split the equity pool, fully diluted equity stakes can dwindle to amounts that make it hard for those founders to retain meaningful upside in their enterprises at later growth stages.
Just food for thought for those who are creating new companies in today’s market conditions.