Your startup is gaining traction and you are bringing in your best team members and board of advisors to help you build your company, be it a towing company or business, eCommerce or even tech-based. You want to offer them equity in exchange for their time, talent, and services. However, to be honest, distributing equity in startups is not as easy as it sounds. The beauty of being a business owner is to constantly learn and grow, to a point of scaling your business. Our main focus in this guide is on startup equity.
Startup equity refers to the degree of ownership that stakeholders have in a company. It refers to the values of shares that founders, investors, employees, and other stakeholders have. As a founder, you must ensure sharing ownership of your business is done with a lot of care and craft. One of the easiest ways of thinking about startup equity is in terms of a pie. A pie can be divided into a finite amount of pieces each piece is worth a certain value. When starting your business, you will own 100 percent of the pie, and this percentage will continue to shrink as others get hold of your company.
To distribute equity in your company, here are some basics to follow.
Founders and co-founders
If you are the sole founder of your company, it will be fairly straightforward to determine your stake. However, if you have a co-founder, determining equity becomes a complicated process. It has to be noted that 65 percent of startups fail because of a fallout between founders. To determine which founder gets what percentage, look at three key issues, which include; the risk each founder takes, level of commitment, and innovation. The ownership of the original idea should determine who gets what.
While building your startup, you will eventually start hiring a talented team who can help bring your business to the next level. Like many founders, you will be faced with tight budgets at the beginning, which will have an impact on your ability to offer competitive employee compensation. If this is the case, you may consider compensating your employees on both salaries and some form of equity. You will be guided by factors such as vesting schedule, type of shares awarded, and education, to determine which employee gets what percentage.
Those who invest in your business, whether angel investors, venture capitalists, friends, or family should receive a certain percentage of your business equity. When an investor puts money in your company, they are taking a financial risk with the hope of receiving a financial return. The amount of equity an investor gets will be depended on the amount they invest and the valuation of a company. If you decide to raise money for your company by following the fundraising route, the conversation about equity should take place during pitching.
You may also consider giving some equity to your advisors. A board of advisors will comprise of experts in your industry who provide strategic direction for your company. It is a common practice for this role to be performed in exchange for equity. Do due diligence to determine the percentage of equity you are willing to part with to your board of advisors.