Startup founders have to be well aware of how to properly distribute equity within the company. How does equity work in a startup? Who can get equity, and how do you determine the shares? Let’s take an in-depth look into the matter.
Startup equity refers to the ownership stake that individuals or entities possess in a newly established company. It represents a share of the company’s value and is typically divided into units known as equity shares.
One key concept to understand is that allocating a portion of your assets rather than holding 100% ownership is crucial for achieving business growth. By issuing startup equity to partners or employees with diverse skills and experience, founders can tap into their abilities and competencies to take the company to new heights.
While the founder’s ownership share may be reduced, the overall value of the business can soar, resulting in a more substantial slice of the pie in terms of value, even if it’s a smaller percentage.
Managing and distributing startup equity requires a consistent approach to avoid oversharing assets. One possible approach is to divide all equity shares equally among stakeholders. However, a dynamic equity model that calculates specific percentages based on factors such as competencies or investments can also be implemented.
🤓 Co-founders, as the individuals who create and launch the new venture, usually receive a significant portion of the initial equity. The distribution of equity among co-founders can vary based on individual roles, responsibilities, and contributions. Transparent discussions and documentation regarding equity distribution are advisable to align expectations and long-term goals.
😎 Startup employees, who invest their skills and knowledge to help the business grow, can also receive equity as an additional incentive. The allocation of equity to employees is typically based on their role, seniority level, and salary. It can come in the form of stock options, restricted stock units (RSUs), or direct ownership of equity shares.
🤔 Advisors play a critical role in guiding startup teams and offering expertise, industry insights, and valuable connections. In exchange for their contributions, advisors may receive equity at a pre-negotiated percentage. Clear terms and expectations should be established for equity arrangements and the scope of advisory services.
🤑 Investors, including angel investors, venture capitalists, and crowdfunding supporters, provide financial backing to startups in exchange for equity grants. The terms and equity share are defined in investment agreements, which may also specify any rights or preferences associated with the issued equity shares.
So there you have it: a starting point for figuring out how to award precious equity to yourself, your co-founders, your investors, advisors, and employees.
And if you want to learn more about startup equity, its types and how to manage it when scaling, check out the full article 👇
