As you know, equity refers to the ownership of your startup. The capable, which is the table that outlines the distribution of shares among startups, is what you use. But it’s not possible to do it in any other way. This can pose a problem for the future of your startup if it’s not done correctly. In the long term, mistakes made when you distribute equity could damage your startup.
An inexperienced founder might feel that the shares of a newly formed company have little or no value.
As you know, equity refers to the ownership of your startup. The capable, which is the table that outlines the distribution of shares among startups, is what you use. But it’s not possible to do it in any other way. This can pose a problem for the future of your startup if it’s not done correctly. In the long term, mistakes made when you distribute equity could damage your startup.
An inexperienced founder might feel that the shares of a newly formed company have little or no value. Does this means that your shares will always remain the same Without value
Shares have value even though they don’t yet have a numerical figure attached. Later on, you might have issues if you give away too much equity, even if your shares don’t have a substantial value.
It is not helpful for founders when others consider their equity to be low-value. My wise colleague NinoSubotic put it this way:
People believe that simply because they were at the idea stage of your startup, they have earned a significant amount of equity.
If it’s not worthwhile, they will expect a substantial portion.
This leads to founders giving away lots of shares to people who aren’t going to benefit long term. Additionally, investors will not be attracted to a startup with extensive capability. In most cases, it is the investors who will take you to the next stage.
Equity is a currency. So use it! It is real value. Shares should be exchanged for some other thing. It should not be given to someone simply because “They want me to be on their capabilities.”
I would like to have a bag full of diamonds. This doesn’t mean I deserve it.
Shares can be a lousy way to pay employees who help your company. Sometimes equity can be a fair payment, and other times money is more appropriate. That is the most important thing—your decision to make.
So who gets equity and why? There are four kinds of people you could have on your capable. Each person has their place.
Co-founders
Although co-founders should hold almost all equity in the early stages, this share will diminish as the company raises capital or hires employees. Spotify founders were at 100% when they started and were at 30% by its IPO.
For such a large share, founders will be expected to work full-time for the startup in return. To ensure your percentage of the startup’s claims, you must sign a Shareholders Agreement and Founders Agreement.
Advisors
Although advisors might be necessary for your startup, it is possible that you don’t have the capital to pay them out of pocket. Instead, offer them a percentage of equity. Their shares mustn’t be contingent on their participation. “I have some tips for your startup” is not an advisor!
Employees
But you may not be able to attract the best talent to your startup. You can use an option pool to pay employees with shares partly added toIt is possible to make an adequate salary.
Investors
The one we’ve all been waiting to see — investors! Investors want to ride along but don’t want the burden of managing their own time. Instead, investors prefer to invest capital. Investors decide the company’s value and what your shares are worth. Investors also need to consider the long term. They will invest at a lower valuation and will be able to take too much of your equity. This will make your startup less attractive for future investors.
You can see that managing your equity early is critical to the success and health of your startup. Treat it as real money. It’s not a way to make money, but you will find yourself in debt if you keep giving it away. Even though your shares may not have a value yet, that does not make them worthless.
It’s about looking to the future — how someone will contribute and how vital your startup will be in the future.
Shareholders should have passion and care. It’s all about equity!
