Gross and Net Equity Burn Benchmarks for Private Companies

Equity burn rate is one of the most confusing, stressful, and debated metrics, especially for private companies. In particular, I find that three aspects of equity burn make it a perplexing topic.

Here, I’ll dive into these three areas, and share some equity burn benchmarks for private companies by company stage.

The Challenge of Equity Burn Rate

Let’s start with three confusing aspects of equity burn:

1. Net vs Gross Equity Burn Rate

People usually think of “equity burn” as a reference to their “gross equity burn”. But in some cases, they might be referring to “net equity burn”.

Net equity burn rate is calculated using the total number of shares issued net of canceled, expired, and forfeited shares. Gross equity burn rate is calculated using the total number of shares issued, including canceled, expired, and forfeited shares.

Both net and gross burn rates matter and should be taken into account to ensure that you do not have blind spots. But using “equity burn” without specifying “gross” or “net” can lead to “apples vs bananas” comparisons.

2. Lack of Equity Benchmarks for Private Companies

Historically, it has been essentially impossible to get equity burn benchmarks for private companies.

3. Public Market Transition to SBC Metrics

Once companies become public, they are sometimes held accountable to an additional set of stock-based compensation (SBC) metrics (e.g. SBC as a % of revenue). So, the goalpost moves to a different set of metrics and benchmarks as your company goes public.

Not to mention the challenging conversations with your board or compensation committee whenever the Employee Stock Ownership Plan (ESOP) pool needs an increase.

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Equity Burn Rate Benchmarks

Next, let’s take a look at Pave’s real-time benchmarks for gross and net equity burn rates by stage from 1,421 analyzed private companies, primarily in the tech sector.

The findings show that for private companies, both gross and net annual equity burn rates increase as companies mature.

Leveraging benchmarks can help you gauge how your company stacks up and prepare for board discussions or future fundraising negotiations. How does your company compare?