Founder refresh grants have been top of mind for us here at Bowery Capital. As many of our portfolio companies mature and raise follow on financing, the Acceleration Team becomes involved in helping founders think about their own equity. It is a fairly common practice for founders and employees to receive option refreshes during the course of their tenure. There are a lot of resources for employees to understand this. However, the conversation tends to be more theoretical when discussing with founders. They no longer have the same percent of ownership as when they first started and have likely been diluted substantially. Should founders even receive refreshes? When is the right time for a refresh and how much should they be asking for? In trying to quickly understand the general landscape, our natural instinct was to go to our networks. Interestingly, we found that this is a topic that is generally met with no response or lots of unknowns. Given the limited amount of data that is publicly available and the fact that this is a fairly common question for founders, we spent time researching this topic. Our sample set was roughly 124 founders at the Series B and Series C stage both inside and outside of our portfolio. Below are the key takeaways.
1. Fundraising Generally Drives Founder Refresh Grants. In the majority of our discussions and follow up analysis, founders are way out in front of their vesting end dates and have the refresh conversation usually after three or four financing rounds or about 36 months. Call this the Series B or Series C. In all instances, founders do this around the fundraising event and usually shortly following the closing of the round. We found that sometimes this is done at closing of the round provided the new investor is made aware up front and discussions with the board happen in parallel to the round.
2. Ranges Didn’t Vary Much With Our Group But “Top Ups” Did. All of our data involved Series B and Series C stage companies. Prior to a Series B and Series C fundraise we did not see much difference in ownership ranges. Individual founders ownership ranged from 10% up to 35% for both stages. We note that this is largely dependent on the number of founders. What are the grants that happen around these financing events? Grants ranged from 3% on the low end to 10% on the high end for both stages. In all cases, the idea was specifically to top up a founder and get them to a specific round number. For instance, if a founder was at 7% the consideration was to get them back to 10% post financing. If a founder was at 17% the consideration was to get them back to 20% post financing.
3. Founder Refresh Grants Are Difficult For Some. In our research we found refreshes tend to only matter if the founder is also the CEO, CTO, or other senior executive. In addition, the board must think the individual should continue to be an executive for some time. In all instances, if the founder was not in an essential executive on the leadership team it became hard to justify any sort of refresh or top up. As a result, in all these instances the grant did not happen. In our research, not all founders get refreshes.
4. 10% Seems To Be The Floor For Most Founders. Qualitatively, we found that founders had an aversion to going below 10% ownership in their company. Perhaps this is due to some of the companies going public in 2017 and 2018 where founders owned very little of their companies. Perhaps it is just a qualitative measure that founders conceptually think is the floor. We didn’t dig in much, but in all our conversations this was the key number that founders thought about.
5. SF Founders Maintained More Ownership Versus North East Founders. At the Series C stage, we found that founder ownership went up to 34% for some founders based in SF. In comparison, the height of north east founders was roughly 20% ownership at the Series C stage. Several of these companies had single founders. But some did not. We believe this is tied with SF being a more mature market with a significantly larger pool of founders who are also the CEO.
Founder refresh grants are a tricky but necessary discussion to have with your board. We hope this brings some clarity to the topic. While we will not release the data publicly, reach out to anyone on our team and we would be happy to share additional learnings and some of the data.
If you liked “Founder Refresh Grants & Continuing To Grow Your Company” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.