Founder Equity: Worth 2.3 times more with Forward Partners
Over the the last month we’ve been excited and proud to share the data on how we help founders grow and build big, successful businesses. This is the final piece in that series and one that we hope will resonate strongly with founders. We’ll be revealing the stats on the average founder equity at Series A in the UK and how we help founders double the value of their stake.
- Forward Partners companies typically have equity worth 2.3 times the average of all those companies who manage to reach Series A.
Forward Partners doubles their investment at pre-seed with services in kind.
Rich or King/Queen?
When you found a company, you own it all. The reasons founders start businesses varies greatly. Some want to earn large sums of money, whilst others want to be their own boss, and retain complete control of the enterprises they have created. However it is only in exceptional circumstances that these two circumstance exist together. Usually in the pursuit of rapid growth you will need to take on external investment to capitalise fully on the opportunity you’ve seen in the market, and in return investors will own some of your company.
Lots of founders find the idea of giving up part of their company daunting. This trade off that entrepreneurs make is discussed in this Harvard Business Review. The choice essentially comes down to whether you want to be rich or whether you want to be king/queen? It’s unfortunately true that trying to maximise one, jeopardises the other.
While almost all founders will have to give up part of their company to compete in the market, it’s clear that a balance needs to be struck between incentives and control, investment and ownership.
The Equity Equation (a la Paul Graham)
Deciding when to raise and how much equity to give up is always an extremely tough decision to make. Whether it’s giving equity to investors or incentivising a new hire, you should always feel richer after (and because) of trading equity than if you had chosen not to. One method for determining whether you are better off because of a trade is summed up eloquently by Paul Graham in his essays:
He states that if n is the proportion of the company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). For example Greg Mcadoo from Sequoia said when they invest they like to take about 30% of a company. That formula, with Sequoia as an investor, is 1/0.7 = 1.43, meaning that deal is worth taking if they can improve your outcome by more than 43%. For the average startup, that would be an extraordinary bargain. It might improve the average startup's prospects by more than 43% just to be able to say they were funded by Sequoia, even if they never actually got the money.
Where should you be at Series A?
After having raised a seed round most founders will be thinking about Series A funding and the milestones required to get there. There’s a big jump between these two points. Getting the metrics required for a Series A is many times harder than those needed for Seed. And there’s not long to do it. Most companies that go onto raise a Series A do so in 17 months, so if it takes 5 months to raise you’ve only got a year to hit those lofty targets. It’s a big challenge which is why only a fifth of those that raise a seed round actually manage to achieve this next round of funding.
To add an additional layer of complexity for founders, the information around equity stakes at Series A is often outdated and tends to be US focused. Furthermore, many investors also give different, and sometimes conflicting guidance on how much you should be owning of your company by Series A. In our discussions with investors we heard ranges from 35% up to 60%.
To understand this properly we analysed Crunchbase data from companies across the UK and found that after Seed but before Series A founders had on average retained 50% of their company and they typically went on to give 21% to their Series A investors.
Equity is more than just a %
Equity is often thought of as simply a percentage ownership in a company. However there are two parts to the founder equity story. Those parts are:
The price per share i.e. the valuation
The number of shares owned i.e. your percentage ownership
It is important to consider both of these factors together when thinking about equity as a metric to aim for, particularly if optimising one comes at the expense of the other and therefore decreases your overall value.
Optimising for long-term success
At Forward Partners we invest between £300 - 500k at the pre-seed stage plus what is roughly equivalent to the same again in-kind from access to our Product, Growth and Tech teams.
We sometimes get push back from founders on the valuations that we offer at pre-seed. If you consider only the cash component of our investment, it’s usually true that you can achieve better valuations from angels who can often take advantage of tax breaks to sweeten their deal. We’re confident though that our in-kind services more than make up the difference for our portfolio companies. For a start, we improve your odds of successfully getting to Series A by 400%. We don’t stop there though, when we crunched the numbers we found that at Series A the founders of Forward Partners companies typically have equity worth 2.3 times Crunchbase averages.
We understand that it can feel painful to take a hit on equity early on, but if you want to be ‘rich’ rather than be ‘king/queen’ then the data shows working with us is the right path to take. That’s clear by Series A and as our portfolio matures we believe the effect will become more pronounced.
We’ve recently hit the milestone of 50 investment and we can’t wait to invest in and support the next 50 entrepreneurs in creating their visions of the future and reaching Series A with a higher value on their equity..