typical startup equity structure

During start up, entrepreneurs should consider the number of founders’ shares and stock options to be issued in relationship to the current valuation of their business and/or the valuation they hope to achieve in the first round of investment from outside investors. How to Structure Startup Equity – Everything you wanted to know about Startup Equity Structure, Startup Equity Dilution, Startup Equity Compensation, Startup Equity for Employees, and Founders Equity. Management will likely change over the life of the business and they are usually incented with a combination of cash compensation and stock options. ​confusion​ You actually want to know the total issued shares, but even this number can be confusing, as it can be computed more than one way.

Tech startup entrepreneurs should seek professional legal advice when setting up or making changes to their capitalization structure, choosing legal counsel with experience in setting up early-stage ventures and working on investment rounds for their clients. Startup Equity Compensation -Your Options. The investor will try to keep the period to the longest to receive the fixed dividend payments.

Restricted Stock Unit (RSU) – Similar to RSA, in this option too the date of award is in the future, if specified conditions may relate to performance or tenure of employment. When you provide an employee some stock, you should let it vest over time, so in this way, the employee will gain 25% of the allocated stock in the first year, 50% in the second year, in a linear manner.

Preferred Stock – As the name implies, preferred stock comes with more privileges and rights. A key difference between fully diluted shares and shares issued and outstanding is that the total of fully diluted shares will include all the shares in the employee option pool that are reserved but not yet issued to employees. Thus the dividend amount will pile up and the company is obligated to pay the lump sum amount when possible. While common stock can be rewarding, depending on the company’s overall growth, you should stay on the alert and see if preferred stock is too prevalent in the company. These shareholders are likely to receive dividend after all classes of stock, and mostly would hold special voting rights. (Often the multiple is 1X, but it can be 2X or higher.). The founders of a startup generally purchase shares at the time of incorporating the company at a nominal price per share, such as $0.0001 per share, paid in cash, since at that time the company will have no operating history, few assets and thus little value. Equity vesting is also known as an earn in agreement, which is a form of startup equity structure and startup equity compensation.

Startup Equity Calculator Tool: Check out EZ Numbers (made just for startups), it will really help you calculate your startup equity structure based on revenue, expenses, and automatically calculate taxes/insurance/benefits that you’ll need to plan for. Participating and non-participating – Common stock holder divide the remaining dividends among themselves post the payments to preferred shares. Any form of ownership represented through stocks is called equity. The amount raised at various stages is typically smaller for companies located outside of Silicon Valley, where what would be called a seed round may be called a Series A in, say, Houston, Denver, or Columbus, where there are fewer companies competing for investment from fewer venture firms, and costs associated with growth (including providing livable salaries) are lower. Financing refers both to fundraising from outside sources and to bringing in revenue from selling a product or service.

If you’re an entrepreneur trying to divide your shares wisely, you should brush up on the concept of startup equity vesting. “If lot of equity is lost at this stage, co-founder dilution will be too high, which might lead to dissatisfaction in case of number of co-founders being more in number (two or more),” he added. The key employees in a startup may be granted more stock (after dilution occurs) in order to acknowledge their contribution to the company. We’ve put together this article to help you decide, summarising industry-leading reports from Index Ventures and Balderton Capital , and drawing from our own data on SeedLegals to give you a comprehensive view. Because of liquidation preference, those holding preferred stock (investors) will have to be paid before those holding common stock (employees).
It’s worth understanding that investors and entrepreneurs negotiate a lot of the details around preferences, including: The multiple, a number designating how many times the investor must be paid back before common shareholders receive proceeds. If you found this post worthwhile, please share! Preferred shares have higher preference for dividend shares.

What is equity? However, this option is executed mostly when the investor and the startup are not at consensus regarding valuations. **, ​caution​ Most startups don’t get far. Fraser Milner Casgrain. Stock option is the special privilege given to the buyer to buy or sell the stock at a pre-determined future date at the agreed-upon price. They are issued shortly after the formation of the company. The org chart with formal structure should be taken when the startup has grown to be a firm of more than 50 people. However, no cash purchase of shares has been made. There are four groups that typically get a portion of the startup pie: Co-Founders; Advisors; Investors; Employees; Every startup will offer equity to some combination of those four categories. Very roughly, typical … When investors and leadership in a company expect the company to do better than it actually does, it can have a lot of disappointing consequences for shareholders. ​danger​ Of course, things do not always go well, and the valuation of a company does not always go up. In general, preferred stock has “rights, preferences, and privileges” that common stock does not have. It’s worth employees (and founders) understanding that a small pool can be a good thing in that it reflects the company preserving ownership in negotiations with investors.

Venture capitalists invest in companies they perceive to be capable of growing quickly and commanding significant market share. Entrepreneurs must exercise caution while revealing the outstanding number of shares to an employee who’s not a part of the core team of founders. ​confusion​ The terminology mentioned here isn’t universally applied. *, ​Definition​ Investors often ask for rights to be paid back first in exchange for their investment. But the catch here is that startups may not readily declare the outstanding number of shares when an employee joins their ranks, and you’ll need to know this in order to know if you’re getting a fair deal.

These are special instruments that have properties of both debt and equity. Once the pool is established, the company’s board of directors grants stock from the pool to employees as they join the company.

And who gets it? To know about the extent of ownership that you hold, you should know the overall number of shares issued by the company (often termed as the outstanding number of shares). CCPCs enjoy benefits including the right to claim refundable cash Investment Tax Credits under the. This clause is with the intention to get the founders some cash out. Keep in mind that these numbers are more typical for startups located in California. Now that the bare basics have been covered, you’ll need to learn about the two classes of stock. By the end of the fourth year, the employee will have 100% of his/her stock. Let’s start with the most basic of basics: Who actually gets startup equity. However, they are entitled to higher ownership and voting rights. These are called term shares, while some preferred shares are like common stock, and can be held as long as the company is running. Plus you can look like a pro startup with fancy reports for investors . *, ​caution​ Each stage reflects the reduction of risk and increased dilution. The increase in personnel indicates the expansion of the business range. ​Definition​ Venture capital is a form of financing for early-stage companies that individual investors or investment firms provide in exchange for partial ownership, or equity, in a company. It is good to know what the classifications of equity shares are and who gets what in case one decides to start a business, raise funds, or in case of insolvency.

According to an analysis of angel investments, by Susa Ventures general partner Leo Polovets, more than half of investments fail; one in 3 are small successes (1X to 5X returns); one in 8 are big successes (5X to 30X); and one in 20 are huge successes (30X+).

They have an extensive restriction in terms of buying and holding the stocks and are linked with a vesting period (four years or more), post which the holders have a right to buy at a discounted price. This will ultimately result in startup equity dilution diluting the value of the shares that you hold. However with few resources out there it can sometimes be hard to know how much equity to give out, and how to optimally structure equity compensation in your company. Exercising options or warrants to purchase shares from the company.

Retrieved May 21, 2009, from http://www.lexology.com/library/detail.aspx?g=7c476ef3-67a9-4a33-8053-05331cb29e6a. The size of the pool is determined by complex factors between founders and investors. In common practice, startups organise their stock into two main classes – common and preferred stock. Usually one voting common share class but sometimes a non-voting common share class may be established for stock option grants in addition to voting share class. Restricted Stock Award (RSA) – Under this, the employee receives an award of stock subject to certain underlying conditions. Ensure you understand key relevant terms (e.g.,founders shares, initial equity issuance). Hiring a lawyer may seem like a big expense for your startup, but setting up your business incorrectly will cost you more in the long run. ​technical​ This primer by Charles Yu gives a concise overview. ​confusion​ Unlike the terminology around corporations, which has legal significance, the term startup is informal, and not everyone uses it consistently.

These diagrams simplify complexities such as the ones discussed in that analysis, but they give a sense of how ownership can be diluted. It can happen that a company fails entirely and all ownership stakes become worthless, or that the valuation is lower than expected and certain kinds of shares become worthless while other kinds have some value. If you hold 100 shares (founder’s stock, with a vesting period of four years) and you leave the company within two years, the company will buy back the unvested portion of the stock. Founders and companies are affected significantly and in subtle ways by these considerations. (These are also sometimes called classes of shares, though that term has another meaning in the context of mutual funds.). For a more complete understanding, in addition to asking about the fully-diluted capitalization you can ask about any convertible securities outstanding that are not included in that number. As decided during time of issue, the company’s option to repurchase lapses over the agreed timeline and the shares become vested.

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