Founder Dilution - How Much Is "Normal"?

This is a subject near and dear to entrepreneurs, maybe the dearest subject of them all. Founders start out with 100% of the company and every time they raise capital and/or issue stock and options to their management team, that number goes down.

Founders who "go all the way" through the process of building a lasting and sustainable/profitable business (as opposed to an early exit) will generally suffer the most dilution. In my experience, it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it's all said and done. The equity split at 20% for the founders will typically be; 20-25% for the management team, 20% for the founders, and 55-60% for the investors (angel all the way to late stage VC).

That's a rule of thumb and it can be worse (I've seen founders end up with less than 5%) and it can be better (the google founders own >25% of the company after the dilution of an IPO). It all depends on the amount of capital a company needs to raise and the valuations it can raise it at and the timing of those financings.

Founders who opt for a "quick flip" or any form of early exit (early means to me before the company becomes sustainable/profitable) can see much less dilution. Joshua Schachter owned more than 50% of delicious when it was bought by Yahoo! The four founders of FeedBurner owned well north of 25% of the company when it was sold to Google. Those exits are generally for less money so its more ownership times less total value. But even so, that can work out well for the founders and is a big reason why early exits continue to be part of the venture capital landscape.

Most of what I've just written is pretty well known in the venture capital/startup world. Sim Simeonov of Polaris Venture Partners would like to get a more exact set of data on this and he's put up an online survey hoping that entrepreneurs of all kinds will take the time to fill it out so we can be more exact.

It's a short survey and won't take long to fill it out. So if you've got data to share, please take a minute or two and fill out the survey. Sim will publish the data on his blog and I'll reblog it here as well.

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Comments (Archived):

  1. Chris Hill

    Do your equity numbers for the founders assume a four year vesting cycle? Obviously going from angel to later stage VC will take a number of years. In your ‘quick flip’ scenario, founders will avoid dilution in later rounds but won’t they also prevent themselves from fully vesting the equity they owned pre-investment?

    1. fredwilson

      Founder vesting provisions are all over the map on the early exit but Ithink the most common provision is accelerated vesting of founder equity onexitFounder vesting is generally to protect the investors and other foundersfrom one of the founders deciding they aren’t into it any more and takingoff with a big slug of equity

      1. Chris Hill

        I understand the investors and other founders wanting to be protected against one founder walking away with a big slug of equity but this is irrelevant to my point. The case that you described in your original post was the ‘quick flip’ scenario and how to maintain founder equity.The most common form of acceleration is one year, whether single or double trigger, correct? Under your ‘quick flip’ scenario, if an investor were to exit a two-year old investment then the founder would only earn 75% of his fully-diluted equity (two years of vesting plus one year acceleration).Is this correct? If so, is the un-vested founder’s equity split pro-ratably among all equity holders? That would seem to unduly enrich the investor. How did you handle this with FeedBurner?

        1. tmarman

          Chris, I think what Fred was saying is that the purpose of these provisions is to protect “dead equity” from a founder who walked vs. punishing a founder for a quick exit.Our stock purchase agreement says that basically with any “Change of Control” (merger or dissolution) the Repurchase Right goes away (i.e., we are fully vested). I think it’s fairly customary to accelerate all vesting .

          1. fredwilson

            Tim ­ that is pretty normal, but again, there is no “standard” on this one.It’s negotiated a lot.

        2. rafer

          Chris, for founders, anything other then a full vestup on early sale is unusual (and unreasonable).

        3. fredwilson

          I’m not sure where I said this (another comment?) but most founder vestingprovisions have acceleration upon exit and it’s not normally just one year.Speaking of FeedBurner, Dick Costolo wrote what I think is the best post onvesting upon exit that I’ve ever seen…

  2. curmudgeonly troll

    wondering how the management equity breaks bring in a CEO on 50% basis of founder(s), and spread additional 50+% to 5 senior managers?or does that include options for all employees?presumably only applies when founders don’t remain top managers through exit/IPO, which I guess is the default assumption?if you had 2 co-founders, bringing CEO in on same basis seems like a good deal for the CEO who is taking far less risk with a VC-backed company.

    1. fredwilson

      There’s no “typical” in all of thisBut a hired CEO will generally get 5-7% of the company if they join earlyand less if they join when the business is already ramping and making moneyIf the entire team is 20%, think 25% to CEO, 75% to rest of mgmt team.That’s everyone include admins

      1. curmudgeonly troll

        makes much more sense – thanks for clarifying!

  3. Blaine Cook

    Your split doesn’t include non-management employees. That’s disappointing. To what extent do you think employee grants are normal or fair?

    1. fredwilson

      Sure it doesThe 20-25% includes all employees, including the ones who are no longer withthe companyYour last question Blaine is really hard to answerMy guess is that many of them are fair, particularly when the founders areexperienced and so are the employeesInequity results largely from inexperience on the founders part and to alesser extent on the employee’s part

      1. Kevin

        So what’s a normal grant for, say, the first employee? Assuming a non-manager engineer type.

        1. fredwilson

          There’s no normalIs the engineer a co-founder?Are there engineers on the founding team?Has there been an angel financing already?

          1. Kevin

            I am curious about the answer for all those situations. I don’t really know how to learn this stuff besides bugging VCs on their blogs. ;-)Let’s say the 2 co-founders (1 engineer 1 business-type) have just gotten $100k angel and are hiring an engineer. What sort of equity range for that engineer would you expect.

          2. fredwilson


          3. Facebook User

            1-2% after seed funding dilution or on exit? If later then the key engineer (typical first hire) need to start with 4-8% post seed, no?

          4. Facebook User

            er, make that 3-6%. I don’t want to encourage unreasonable expectations. ;-p

          5. fredwilson

            1-2% post seed funding is what I think is typical.That would be ~0.5% at exit.

          6. Facebook User

            thx Fred. I’ve been involved mostly with self-funded startups at prototyping stage so my numbers are not typical. I did turn down a first hire position awhile back that exited for $100mil but I have no regrets since 0.5% of that after 4 years is… Maybe I am being unreasonable.Anyway, I now spend most of the time on the other side of the table so 1-2% post seed sounds very reasonable. 😉 Thanks again for a rare insight into a rather elusive subject.

          7. fredwilson

            I’ve seen higher and lower but that seems about where the avg is

      2. Blaine Cook

        Ahh, ok, that clarifies things, thanks. “20-25% for the management team” was the bit that confused me, since it seemed to imply just the management, and I wasn’t sure where to fit non-management employees.Agreed that the actual split is dependent on experience, and hard to answer. 😉 I was just worried that you were saying that only founders and management were entitled to a non-trivial amount of stock.

        1. fredwilson

          Sorry that wasn’t clear Blaine. Former employees often make up a meaningfulpart of the cap table. At Facebook, I think it’s a significant number.

  4. AndyFinkle

    I would think that data from a few years back will be different as a result of the economic environment we are in currently. With the IPO market locked up, I think we will see more exits like delicious. I think this will be especially true in the lower tiers (sub $75 valuations).I hope that Sim’s survey asks for dates as well, it will be interesting to see HOW things have changed (if my assumption that they have is even correct)

    1. nabeel

      I would be hard pressed to guess any market, but I certainly wouldn’t guess on more early exits. To see many more early exits like Delicious, you’re implying a willing buyer. At least what I’ve seen so far is much more stratification — folks boning up on massive rounds to make it through the rough times, and folks that are going to get poached on their deathbed (sometimes by that first batch). The idea that there are folks out there paying up to buy early I haven’t seen, but maybe I’m not looking closely.And don’t forget the third category of course, those that won’t exit in the near term because they can get profitable and wait, or have a long enough time horizon from founding and enough momentum to make it through.

      1. AndyFinkle

        I don’t disagree …I was more thinking some of the larger Public netco’s buying at good valuations & LOTS of small mergers of equals. Re your 3rd category…Lots of companies in the deadpool (IMO) never needed to get there. Even my very 1st startup (1996) is STILL alive (albeight not making meaningful money)…and is TOTALLY self sustaining

      2. fredwilson

        The third category is what we are hoping for in all of our investments

  5. Ales Spetic

    My rule of thumb is: one round, one third dillution. That assumes that the round is a “proper” one, such that it takes the company to the next big milestone. It implicitly sets the valuation and expectations. Reality can be different, however it’s a good model to start with.

  6. David Semeria

    Fred, your breakdowns make no distinction between common and preference shares.You just need to look at recent events at FB to see the difference between the two. Microsoft bought preference shares at a $15bn valuation, whilst FB itself values its own common stock at around $3.6bn.Even if the 4-5x difference is excessive, the general point holds.Since investors generally get preference stock, whilst founders and employees get common, the true dilution is even higher than your numbers suggest, and further reinforces the notion that VC money is, in my view, very expensive.

    1. rafer

      The jargon is mildly confusing, because not all Preferred shares have preferences, but in general you are correct. The VCs take their money off the top (based on clauses called liquidity preferences and/or participation) from 1 – 3X before the remaining proceeds are split according to share amounts — including the VCs shares once again.

      1. David Semeria

        My fault: in the UK we call preferred stock preference shares.

      2. fredwilson

        Scott ­ I’m not sure I’m agreeing with your 1-3x math. Most of the preferredstock we own is straight 1x no participation. In that case, above thevaluation we paid going in, we share equally with the founder.

        1. rafer

          That’s a fair exception to take. I was stereotyping and should have made clear that USV, FRC, and maybe a couple of others were consistent exceptions. What I described is median behavior for funds, particularly large ones, except at the top of the cycle.

          1. fredwilson

            Are you sure about that scott? I’ve seen a lot of term sheets over the years and participation and liq multiples have been in the minority of them

    2. fredwilson

      A couple points on that david:1. many companies in our portfolio have built values well above the amountof preference in their cap structure so in those situations, common and pfdare essentially identical. The Facebook situation with the MSFT stock is abit unusual and I wouldn’t focus too much on it.2. the times when pfd vs common matters is normally a sale/exit where theinvestors don’t get a very good return.Certainly entrepreneurs should understand the math around preference. Webuild liquidation models for every one of our companies and share them withthe founders and management freely so they understand when and wherepreference matters and when it does not.

      1. David Semeria

        Thanks Fred.It’s ironic that entrepreneurs (like me) voice our gripes here when you yourself display a level of openness and honesty far above the industry average.Chapeau!

        1. fredwilson

          Maybe there’s a reason for that. The best companies listen to their customers. And entrepreneurs are the VC’s customers

          1. David Semeria

            People like you, Guy Kawasaki, Robert Scoble etc, demonstrate that you don’t have to behave like JR Ewing to make your mark.That said (and before the violin playing starts) I would still argue strongly in favour of all stockholders owning only common. A lot depends on what the founders initially bring to the table, and how much value the VC adds.In the same way that some people believe a handshake is worth more than a contract, I believe that any multi-owner business should be founded on equality, trust, and a general feeling that if you push the other guy too far he’ll moydah ya.

          2. fredwilson

            i hear that all the time, but let’s say you invest $1mm in my company and you negotiate for 10% fof the business (a $10mm valuation)you have one board seat but i control the businessi decide to sell the business for $5mm, i take $4.5mm and you get $ that fair?no, it is notthat’s why preferred stock exists, plain and simple

          3. David Semeria

            That’s what shareholder agreements are for.What about: founder confers 1m lines of code, patents, trademarks etc and the investor confers some money. Things don’t work out and the company gets acquired for less than the investor put in. The investor exerts his 1x preference and keeps all the money.That’s even less fair, especially if the acquirer is purchasing the company for the original code and IP.

          4. fredwilson

            Shareholder agreements are about blocking deals. That’s not a good answer. I hate vetos and blocks and much prefer creating an understanding upfront about how the pie will get divided and let the entrepreneur call the shots in terms of exitThere might be some investors who will buy common in an early stage venture they control but I am not one of themThere’s a reason that pfd stock exists and its the market standardSome investors got hosed a long time ago and learned from it

          5. David Semeria

            Clearly, each situation should be judged on its own merit.And whilst I disagree with you on the issue of preferred stock, and as I’ve made clear above, I really respect your willingness to engage the entrepreneurial community – especially on thorny issues such as this.

          6. fredwilson

            We are allowed to disagree and it’s really important for people who disagreeto understand the other’s perspective. So this dialog has been valuable tous and to everyone who reads it

  7. Seth Lieberman

    It will be interesting to see how equity grants and dilution changes over the next few years. Many current companies are going to (have been) crammed down due to the economy and exits are pushed off. Founders will have to raise more capital and suffer more dilution. At the same time employees with existing option grants may be under water- key folks will want to be made whole. On the other side new employees/mgmt may care less about the equity and more about the cash as happened in 2001-2003. I suspect the overall effect will be that founders will end up with less equity than they anticipated.

    1. fredwilson

      That will be unfortunate.I know this is a touchy subject and I hesitate to bring it up. But the wholeSequoia “RIP Good Times” thing was as much about making sure founders cutback and conserved cash to preserve equity ownerships as it was anythingelse. VCs get a bad rap for cramming down and diluting entrepreneurs. And itwill always be the case because it is our capital that causes the dilution.But most VCs I know, and certainly the best VCs, don’t want to seeentrepreneurs get diluted. It’s not a zero sum game by any measure and theideal is we make money together.

      1. Seth Lieberman

        Fred- Sorry, to be clear I was not implying that VCs and others were unfairly or egregiously diluting founders. My logic was really quite simple:1. Capital is very scarce right now2. Economic times are uncertain3. Therefore those with capital (you et all) will require more for your risk profile.4. That means more equity, more security, more [insert value here]5. QED existing equity holders will have less.I think this is perfectly reasonable and in fact correct. And of course, existing shareholders may have less today, but more in the long run. I do believe most VCs (perhaps you are even above and beyond in your enlightenment) realize that capital contributions are not, in and of themselves, value creation. They are simply a means to value creation and that is what entrepreneurs do, so if entrepreneurs have no vested interest, they won’t play. So making sure mgmt and founders etc are a piece of the pie is the only way to build value. But my comment stands that I think where as 2 years ago a founder might have kept X, he/she will now end up with .75X. A entrepreneur might be happy at productive at 8% but would prefer 12%, but can not longer keep that much.

        1. fredwilson

          I didn’t think you were implying thatI saw it as an oppty to get on my soapbox about VC/founder dilution issuesYou may be correct but I am working hard to see that it doesn’t have tohappen that way in our companies

  8. Phil

    If a project / “start up” is virtually 100% automated, runs smoothly with only a few hours of work a day by a project manager, a few hours a week programmer time, is seeing steady natural growth and is Turing a small profit, would it be best to attempt an exit at this stage?Or is it better to ramp up and build a full management / marketing / engineering team along with it’s own incorporation etc and sell a developed independent company, even though the newly formed company may take some time to realize a profit?

    1. fredwilson

      There’s no way to answer that question without seeing what the market wouldpay for it.If you can get a bid, then you can evaluate that against the cost anddilution of the go it alone approach.

  9. Greg G.

    I’ve been looking for solid information like this for months. TY.

  10. Daniel Cohen

    I’ve heard Sequoia talking about 25% for mgmt AND founders, and then 75% for investors. Also, I would think that we will see less % for founders in deals done in 2009/2010.

    1. fredwilson

      Let’s see what Sim’s survey says. I bet it’s less than 75% for investors.

  11. Prof. Noam Wasserman

    Fred:As Philip Baddeley mentioned above, I have built a very rich dataset (thousands of private IT ventures over the last decade) for my research on founders. I’ve already done some analyses in this realm, but would love to discuss with you what additional analyses might shed light on your questions (and would be fine with your posting the results here if you wanted). Drop me a line if you want to discuss it.Professor Noam WassermanHarvard Business School

    1. fredwilson

      Noam, I will email you

  12. Dan Cornish

    The founding team gets 5% equity by the time an average time an exit comes along and there is a 50% chance the founding team or at least the CEO will be replaced and only a 20% chance of success (meaning an exit with liquidity) in normal times. Now in uncertain times the chance of a an exit is less and the dilution and terms of the founding team will be more harsh, the argument for bootstrapping or only Angel investment becomes stronger for the software sector. I am sure people can correct my math/statistics but I am wondering if anyone has ever done an analysis on the overall returns to founders as a group? Are the returns the same profile as LPs in Venture funds?

    1. fredwilson

      DanI think this is an overly pessimistic assessmentNoam Wasserman, a professor at HBS, has done a lot of research on thisHis blog is at…You may find some good info there

      1. Dan Cornish

        Fred,Thanks for the link. I have learned quite a few things. Some highlights include: First time Founders provide better returns to VC investors, RIch vs. King is the basic question a founder should ask themselves before raising VC and finding the right VC is the most important thing to do while raising money. It dawned on me that a lot of the tension in the VC – Founder relationship comes from a mismatch. A VC who knows a founder is interested in being a king is dishonest if they invest money with the idea that the founder(or founder team) can be kicked out but make them rich. The VC should just pass on this kind of investment. A Founder(Founding team) is dishonest if they think that a VC will not try to remove them if they are not focused on large monetary returns regardless of what happens to the business. The rare relationship is when the goal of building a great business and a great monetary are shared both by investor and Founder.Thanks again for providing such a great community.

        1. fredwilson

          If shakespeare was alive, he’d be writing tragedies about VCs and founders

          1. Prof. Noam Wasserman

            Or HBS case studies about them. :->

          2. fredwilson

            are you sure he could even get into HBS?

  13. mike


  14. Dorian Benkoil

    this kind of info is very useful and exactly the kind of transparency that needs to come to the investment world. Thanks for it, Fred.

  15. Ido Dubrawsky

    I disagree to a certain extent. I think that Tom Friedman’s position is more of taking the $20 billion dollars that the government would pour into trying to save GM and Chrysler and using it for the basic research to take help take ideas from the drawing board to the point that VCs would be more interested in it. Yes there will be some duds but as with any emerging field there will be some entrepreneurial efforts that need just a bit more incubation before it’s “ready for prime time.” As long as the taxpayers and Congress were aware of and on-board with the idea that some of these will fail and that this could be an overall losing proposition and that there won’t be any Congressional witch-hunt should things not work out for the best. It’s still a better gamble than pumping this money into GM’s and Chrysler’s carcasses…there the odds are much higher against success without costing the taxpayer more

  16. Dave Broadwin

    It is always good to be reminded of the effects of dilution and to hear the related concerns. One point that sometimes is lost on my clients is the difference between ownership dilution and financial dilutions. 25% of $100 milliion is better than 75% of $10 million.

  17. leigh

    I know of some cases where “incubators” can take up to 25% in exchange for ‘services’ and/or investing consulting. I think some (especially these days ) younger founders may end up being taken advantage of. It would be great for you to do a post at some point giving some practical advice and boundaries (i.e. when they are being presented with ‘it’s this or nothing’ fear plays a role – but when do you think it’s not worth it no matter what….)

    1. fredwilson

      I would not dilute for anything other than talent or money, period

  18. basilpeters

    Great post and outstanding discussion as usual, Fred. I believe the optimum vesting formula is to vest half of founders’ stock linearly over three years and the other half only on an exit. This creates the best alignment between the founders and early stage investors (in my case, angels). This is my post on why I believe this is most fair to everyone

    1. fredwilson

      So if a founder works for ten years but there is no exit and then leaves, he/she is only half vested?

      1. basilpeters

        Yes, I think that is most fair for two reasons:1. When an investor invests, I believe the implicit agreement is that the entrepreneurs will work to increase the share price AND to execute an exit. In a significant number of exits as much as half of the ultimate value is created during the final transaction (in public companies they call that a control premium, but it’s even more significant in private company exits.) If someone who is part of the team leaves before that value is created, I don’t think it’s fair that they take that value with them.2. If someone leaves, the board has to find a replacement. If the person leaving doesn’t leave some of their equity behind to incentivize their replacement, then all of the other shareholders have to suffer the full dilution effect of their departure (whether it’s equity or cash).I’ve used this formula in virtually all of my early stage investments for over 15 years. Many of the benefits are psychological and extremely difficult to prove, but I am convinced this formula creates a fundamentally better alignment between founders and early stage investors (especially in this exit environment.)

        1. fredwilson

          I’ve been doing VC for about the same time you’ve been doing it Basil and Idon’t feel comfortable tying that much equity to an exitBut I understand your point

          1. basilpeters

            Fred, I respect your position. What I love about this business is that nobody has come close to figuring it all out. I believe the best way we can all move entrepreneurship and early-stage investing forward is through an open, constructive dialog. You are doing an exemplary job of stimulating the discussion and providing the platform.

          2. fredwilson

            And I am sure if we did a deal together, we’d figure out how to structure the vesting in a way that makes both of us and the entrepreneurs comfortable

  19. fredwilson

    Phillip ­ please feel free to use this post and comments as you see fit.Everything that is said on this blog is free to distribute via CC license.I am not aware of any courses on this topic, but HBS does have a pretty deepcase history of startups.