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What Percentage of A Company Does a Typical Entrepreneur Own at Exit?

Q: On average, what percentage of a company does the “typical” entrepreneur own by the time of a “successful” exit? Obviously, huge YMMW, but what’s a reasonable expectation, say, assuming two founders, middle-of-the-road terms from investors, two or three rounds of funding, and an acquisition? Or is the range so broad as to be meaningless? If so, what’s a reasonable upper bound?

A: (Brad) The short answer is “the range is so broad as to be meaningless.”  I love questions that don’t have precise answers, and this is a classic one.  I’ve been involved in companies where the founder equity (sum of all equity the founders have at exit) ranges from less than 5% to greater than 90%.  That’s a pretty big range.

If you assume the law of large numbers, you end up with a normal curve.  Without doing a detailed analysis, most of the deals I’ve been involved with where there are two founders, middle-of-the-road-terms, and two / three rounds of funding result in a tighter range – probably in the 20% – 40% range.  Again – it’s a normal curve so you’ll get higher and lower cases.

May 27th, 2007 by     Categories: Equity    
  • Leon Liebman

    I feel this question misses a key point. It is not what percentage of the equity that defines the payout (and I suspect that is the real issue behind the asked question). Rather, it is the percentage of cash remaining for distribution to the equity holders after paying selling expenses and, most important, paying off all the outstanding preferences (preferreds, accumulated but unpaid pref dividends, etc).
    Most vc deals are “have your cake and eat it too” deals. There is nothing wrong with that structure — and remember you the entrepreneurs agreed to it.
    But calculating the payout to equity holders isn’t necessarily closely linked to the percentage of the company owned. Focus on the likely payout range after all the prefs, etc are paid – for me that is the number to attend to.

  • Leon Liebman

    I feel this question misses a key point. It is not what percentage of the equity that defines the payout (and I suspect that is the real issue behind the asked question). Rather, it is the percentage of cash remaining for distribution to the equity holders after paying selling expenses and, most important, paying off all the outstanding preferences (preferreds, accumulated but unpaid pref dividends, etc).
    Most vc deals are “have your cake and eat it too” deals. There is nothing wrong with that structure — and remember you the entrepreneurs agreed to it.
    But calculating the payout to equity holders isn’t necessarily closely linked to the percentage of the company owned. Focus on the likely payout range after all the prefs, etc are paid – for me that is the number to attend to.

  • http://www.labrador.com Larry Kubal

    In my experience, the 20-40% Brad cites sounds about right if it represents all common shares and not just those of the two hypothetical founders.
    I also strongly agree with the previous post that suggests focusing on payouts at various liquidity valuations rather than on percentage ownership.

  • Dan

    An independant contractor wants commission and a percentage of the company for signing on in the early stages of development. He will oversee and develop the sales department. How does this process work and what safegaurds are available for the company as to not give away a portion of the company at the risk of nothing in return?