As your startup begins to gain traction, you may start to assemble a team of talented individuals to help you build your company. Equity is the currency of startups. It’s how you incentivize your team to work hard, stay motivated and help you develop your company. And in exchange for their talents and services, you want to offer them equity but distributing it isn’t an intuitive process.
However, Equity distribution is one of the most difficult parts of building a company. It can seem like complicated math and confusing terminology. Also, you don’t have time to learn about legal paperwork or read dense books on the subject. And you can’t make mistakes with your company’s equity structure as it will indirectly affect the employees’ trust.
But luckily, there are some simple steps, and online startup equity software can help you make the process easier. However, there are specific problems before diving into a fundraising round. This blog will tell you how to distribute startup equity.
How to allocate equity
When a startup begins, the first task is to determine how to distribute equity among its founders. You must consider several factors when allocating startup equity, including the criteria for who gets startup equity and how much each person receives.
When allocating startup equity, it is important to remember that there are two types of shareholders: founder and employee-shareholders. The difference between these two types of shareholders is that founder shareholders share in the company’s profits and losses. In contrast, employee shareholders do not necessarily receive profits or losses from their company’s operations.
How to decide the pool size for each person
As you allocate shares to co-founders and other employees in your startup, you may need to set aside a portion of your company’s shares for an option pool. The ability to offer equity to key employees and top talent is an attractive incentive for cash-strapped startups.
When planning how many new employees to hire, most startups allot 10% to 20% of their stock options to new employees.
How to authorize the shares
To determine how many shares to authorize, you must first select the number of investors you plan to have. The number of shares you authorize will be recorded in your articles of incorporation. This is the total number of shares that can ever be issued, and it’s usually based on the amount of money you intend to raise. Next, you’ll need to determine how much money you need to increase, then divide that by the price per share. The resulting figure is the number of authorized shares you should have.
How to protect your funds
When considering whether or not to give away equity in your business, you should always protect yourself using legally enforceable contracts.
Giving away equity in your business should not be done without careful consideration. It is a big decision that can have severe consequences for both parties involved. For example, the company may risk losing an important employee, and the employee may be at risk of losing the support needed to succeed.
However, if an agreement can be reached between you and the other party involved, then it may be possible for you to get a mutually beneficial arrangement.
Conclusion
Ultimately, The best way to distribute startup equity would be to use startup equity software and ensure an alignment between you, your team, and your advisors. Startups benefit significantly from having a dedicated team of like-minded individuals who share the vision. Distribution of stocks should happen according to the founders’ vision and share in the profits.
