Founder Wealth Calculation: Beyond the Headline Equity %
Your equity percentage means nothing without understanding dilution, option pools, and exit probability. Here's how to calculate what you'll actually make.
You negotiated hard to get 5% equity in your Series A. Congratulations! You're also going to be diluted to 2.8% by Series C. And 62% of startups don't reach meaningful exits. Your actual expected wealth might be a fraction of what the headline percentage suggests.
Most founders negotiate on equity percentage alone. They don't model: future dilution rounds, what happens if they need a Series D, how option pools affect their position, what exit scenarios are actually realistic, or what percentage ownership really means post-exit (some exits pay founders 0% if liquidation preferences are bad).
The Real Math
Expected founder wealth = (Final equity %) × (Exit value) × (Exit probability). You need all three. Most founders only think about the first one.
Understanding Dilution Across Rounds
Dilution is mechanical. Each new funding round divides the cap table. If you own 20% pre-Series A, and a Series A investor buys 25% of the new company, your ownership drops to 15%. It's not a loss—the company is more valuable. But your percentage shrinks.
The question: how much do you shrink? That depends on future rounds. Most founders don't model this seriously.
Example Dilution Path
| Round | Your % | What Happened |
|---|---|---|
| Founding | 100% | (Solo founder, simplified) |
| After co-founder | 50% | Added co-founder with 50% split |
| After SAFE pool | 45% | Reserved 10% for employee option pool |
| After Seed | 32.4% | $2M seed, investors get 28% (post-money dilution) |
| After Series A | 19.4% | $10M Series A, investors get 40% |
| After Series B | 11.6% | $30M Series B, investors get 35% |
You started at 100%, ended at 11.6%. That's normal. Your share of a larger pie is worth more, but the percentage looks small.
The problem: many founders don't plan for this. They negotiate hard for 5% in a Series A thinking they'll end with 5%. They won't. By Series C, they'll likely own 2-3%.
Plan for 3-4 Rounds
Model dilution through Series B or C, not just the current round you're raising. Ask investors: "What do you assume about future rounds?" Most have a point of view.
The Option Pool Trap
Here's something that surprises founders: when a Series A investor negotiates a 10% option pool, they're often negotiating for the new round only. But some investors request the option pool be "carved out" before their investment percentage is calculated.
If you have $10M post-money valuation and the investor invests $3M for 40%, the pool question becomes: is it 10% of $7M (pre-money) or 10% of $10M (post-money)? That difference is huge for everyone's dilution.
Founder-Friendly
Pool is part of the cap table dilution (everyone dilutes equally). Easier to understand, simpler to model.
Investor-Friendly
Pool is "carved out" before investor percentage (founders and existing investors dilute, investor owns their stated %). Better for investors, worse for everyone else.
Negotiate This
Insist that option pools dilute everyone equally. Get it in writing. This is worth <1% of your cap table in many cases, but the precedent matters for future rounds.
Building Expected Value Models
Expected wealth = sum of (scenario value × scenario probability × your equity %). You need three scenarios at minimum: optimistic, realistic, pessimistic.
Assign probability to each. Be honest about your competitive position, market size, and execution risk. Most founders are wildly optimistic.
Three-Scenario Model (Series A, 4% equity)
Pessimistic
- Scenario: Raise Series B, struggle in Series C, get acquired at strategic valuation ($200M) after 7 years
- Your equity: 1.2% (diluted to Series C)
- Your gross proceeds: $200M × 1.2% = $2.4M
- Your net after taxes: ~$1.6M (assuming 35% tax)
- Probability: 30%
- Expected value: $1.6M × 0.30 = $480K
Realistic
- Scenario: Series B at higher valuation, profitable, acquired or IPO at $1.2B in 8 years
- Your equity: 2.1% (modest dilution)
- Your gross proceeds: $1.2B × 2.1% = $25.2M
- Your net after taxes: ~$16.4M
- Probability: 50%
- Expected value: $16.4M × 0.50 = $8.2M
Optimistic
- Scenario: Nail Series B, rapid growth, $10B IPO exit in 10 years
- Your equity: 1.5% (significant dilution for growth)
- Your gross proceeds: $10B × 1.5% = $150M
- Your net after taxes: ~$97.5M
- Probability: 20%
- Expected value: $97.5M × 0.20 = $19.5M
Expected Wealth = $480K + $8.2M + $19.5M = $28.2M
Your 4% in this Series A is worth ~$28M in expected value, not $400M (4% of $10B optimistic valuation). Adjust for your risk tolerance and what you need to live on.
Common Mistakes Founders Make
1. Only Looking at One Round Ahead
You negotiate 5% in Series A thinking you'll stay at 5%. You won't. Model through Series C or exit, whichever comes first.
2. Ignoring Liquidation Preferences
1x non-participating preferred means investors get their money back first, then you negotiate. 3x participating means they get 3x back first. This can reduce your proceeds 50%+ in some scenarios.
3. Not Stress-Testing Scenarios
Most startups don't reach their optimistic case. Weight realistic and pessimistic scenarios more heavily. What does your expected wealth look like if you hit 70% of plan instead of 150%?
4. Forgetting Time Value of Money
A $10M exit in 10 years is worth ~$6M in today's dollars (at 5% discount rate). Time matters. Longer paths to exit reduce expected value even if valuations are higher.
5. Not Understanding Token of Equity Negotiations
You negotiated for 0.5% more in your Series A. That's probably worth <$100K in expected value across all scenarios. Worth fighting for, but don't sacrifice salary or board seat for it.
Build Your Own Wealth Calculator
Here's a simple framework you can build in a spreadsheet:
Document Current Cap Table
List all investors, employees, SAFEs, etc. Know your true fully-diluted ownership including option pool.
Model Future Dilution
Ask your investors: where do you assume we raise Series B? At what valuation? What percent would you want? Model 3-4 rounds.
Build Three Exit Scenarios
Optimistic ($10B+ valuation), Realistic ($500M-$2B), Pessimistic ($50-200M or acqui-hire). Include liquidation preferences impact.
Assign Probabilities Honestly
Research: what % of companies in your category reach IPO? Get acquired? Fail? Use those base rates, then adjust for your specifics.
Calculate Expected Value
(Scenario 1 value × prob) + (Scenario 2 value × prob) + (Scenario 3 value × prob) = Expected wealth. Adjust for taxes and opportunity cost.
Pro Tip: Revisit Quarterly
Your expected wealth changes every round. As you raise money, get traction, or pivot, update your model. It should influence how much salary you take and how much you reinvest.
When to Focus on This
You don't need to do complex modeling at seed stage. But you should by Series A. And you absolutely need this framework by Series B, when the equity you're negotiating for becomes real money.
Early Stage (Seed)
Know your dilution math and option pool terms. Run one optimistic scenario. More than that is false precision.
Growth Stage (Series A+)
Run three scenarios with realistic probabilities. Model through exit. This informs salary/equity trade-offs.
Profitability
You probably won't raise again. Optimize for distributions or IPO path. Expected wealth is less useful if exit is fixed.
Secondary Sales
If you have liquidity opportunity, run scenario where you sell some equity. Compare to expected path.
Need Help Modeling Your Wealth?
Eagle Rock CFO helps founders understand their true financial position. We'll model scenarios, explain liquidation preferences, and build your wealth calculator.
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