How much is your CEO worth?
Probably less than you think
What does CEO equity look like by Revenue band?
In startup land it’s a common misconception that CEOs hold the majority of the company’s equity. While this might be true early on (like heading into a pre-seed round early), a CEOs stake drops precipitously (spelling?) each time the company raises capital.
And a key factor that goes under the radar pretty commonly, which I recently discussed with my friend Matt Crane from
, is how much CEOs also get diluted by their own employees.Let’s say a Founder raises a Series A and gives up 25% of the company. If the employee stock option pool is down to 5% going into the raise, VCs will probably ask the company to top it back up to at least 10% to ensure they can attract top talent over the next ~18 months. So this means the founder is actually getting diluted 30% from this one round.
Now, will those employees make the company more valuable? Definitely (hopefully)! But still - it adds up over multiple rounds, to the tune of +20%.
Here’s a hypothetical illustration of what that equity mix shift may look like over time…
I got curious so I did some digging on the interweb, and lucky for me, some smart folks from a small liberal arts school in Cambridge, MA did a comprehensive study on CEO compensation by Revenue band. They compared the target cash comp and equity holdings of Founder vs Non Founder CEOs as the company scales revenue.
If we ignore the cash component for a second, you can see the average Founder CEO’s equity drops from 40% to 15% on their journey from $0 to $100M in revenue. A similar decline takes place for Non Founder CEOs, dropping from 13% to 5% over the same revenue timeline.
So what does CEO Equity look like at time of IPO?
To get even more specific and focus on an aspirational milestone for many CEOs - going public - Jason Lempkin from SaaSter researched holdings listed in S1 filings. He was wise to break it out according to the number of founders who were still with the company.
This seems to corroborate what we saw in the Revenue band data, with both samples ending at around 15% for individual Founder CEOs at the $100M revenue mark and IPO mark. And this checks out, as historically $100M has been the threshold for sufficient scale to qualify for IPO.
OK, now what does CEO Equity look like by Fundraising Round?
These two data sets painted the broad strokes. But I still needed to size this up by Fundraising Round to bring it full circle. Here’s what I came up with across three different CEO types:
Founder: One guy / gal.
Co Founder: Simple math - when there are two or more co founders, that’s less equity per person.
Non Founder: This is a professional CEO who comes in to operationalize the company, usually after a technical founder gets it off the ground.
My observations from the data:
Co Founders seem to end up with about 2/3rds to 2/5ths the amount of equity compared to if they were going at it alone
Non founders (aka “professional”) CEOs stay within the 1% to 5% range throughout the company lifecycle, and never fall below 1%
However, if you are a professional CEO with a big name and some successes to your name, you can command something closer to 8%
If a Founder manages to keep 10% through IPO, they’ve done really, really well (the data sets above seem to echo this as well)
All three categories see an uptick from Series E to Post IPO. To me, this implies some were able to skip the Series E round and go straight from either Series C (which was more common in the early 2010 - 2016 range, like Twilio) or Series D to IPO.
At the end of the day, CEO dilution is a champagne problem if the company goes parabolic and exits for billions of dollars. I’d rather 10% of a $5 billion dollar company than 100% of a $10 million dollar company. But still, let’s pour some (champagne) out for our CEOs getting squeezed along the way. Afterall, your equity is kinda-sorta coming out of their pocket. No wonder why they negotiate with you so hard…
What I’ve been reading
As a Boston native who wants the startup ecosystem there to thrive, I check in each week with MGMT Boston to learn about the top companies in the area who are hiring, raising funding, and nurturing top operating talent.
Mostly research
An increase in R&D roles usually signals a company is doubling down on it’s development efforts and looking to bring new products to market. More specifically, increasing R&D capacity is viewed as a “bullish” signal. R&D is defined as any role in:
Product
Engineering
The following pre-IPO companies had the most open R&D roles in April. DataBricks is lapping the field, seemingly stepping on the gas when their competitors are cutting costs.
Note: We track the hiring patterns (by department) of 340 public and private tech companies. If there’s a trend you’d like to see, please let us know (1 minute form).
Mostly Crayons
You gotta admit, the designer of the table had exactly her in mind.
Quote I’ve been pondering
“I mean, yes, we’re sinking. But the music is exceptional.”
Overheard on the Titanic
This is extremely well explained CJ! Thanks. It's a great read for a founder to always (re)consider how the exit will look like on questions about raising funds vs continuing bootstrapped.
What are your thoughts on this?