Talking about equity shouldn’t immediately give you cold sweats. Certainly, there are a lot of complex matters involving equity, including complicated legalese, but you won’t have to worry about a lot of it in the beginning.
Just by going on the facts alone, your startup is likely going to fail. But that doesn’t mean it’s impossible. To turn your ambitious idea into a thriving company, you need two primary things:
- Professional advice
This is why equity matters a lot, most of the time at least. So here’s everything you need to know about it.
Think Like an Investor
When building a startup, you have to think like an investor, but what does that mean? It means when you’re going to acquire funding, meaning giving away equity, investors are only going to invest if they believe you will be successful. This questions how well you’re building up your company, and if investors can tell.
Most investors are going to have countless questions in mind, but primarily only two that will significantly influence their decision: does the company have the potential for future growth and can I still profit from my investment with an exit strategy?
If the answer to both is yes, you’ll likely find funding. At that point, your focus needs to be on figuring out how to manage the equity in a manner that lets you retain control.
Share Your Equity Wisely
There’s no absolutely perfect way or rule for how equity should be split between founders. To avoid a lot of arguments and awkward conversations, people decide to split 50/50 or similar equal distribution. But that can lead to a lot of regret and problems for the company going forward.
The reason why 50/50 shouldn’t be done is that each founder has a different skill set and provides either more or less value to the company. For instance, the founder that has the CEO role will have consistently growing responsibilities and a more valuable role. Conclusively, equity needs to be split in terms of value to the company.
Build an Equity Distribution Program
In addition to the people that can get equity (investors and co-founders), it’s necessary to offer startup equity in order to recruit advisors, board members, and employees as well. For first-time investors, it’s difficult to decide how to share the equity. It is advised to use an equity management platform to keep track of your stakes. As a general rule, the stake of equity an employee receives will depend on three factors:
- Their original contribution to the startup
In the earlier stages of your startup, it’s expected to give a senior engineer 1% of the company, while somebody like a business development employee would receive only 0.35%. It’s important to make the distinction of experience and seniority among your employees. You can expect to give a junior engineer 0.15%. The percentages will start to go down over time as your company grows.