A Few Tips

Startup Series - All about Equity

Ask the tough questions at the beginning – what is the basis for the equity split?What happens if a founder leaves

Always split equity based on the time, effort and money put in. Have discussions to finalise, and then document!

Leave room to incentivise performance and growth – you can use a founder stock pool to vest shares from.  There is no standard way to do this – a lot depends on the working relationship as well. 

Designing the equity structure has to be done BEFORE you get down to serious business. Share vesting, stock options, valuations – take the help of experts if needed. 

Determine the value of contributions over a period of time, to encourage ongoing commitment to the business. A period of 3 years is a good way of doing this. 

Explore clawbacks, lookbacks and buybacks as part of the exercise. 

Shares in your company represent your ideas and your hard work. Don’t give it away for cheap. Borrow where you can.

Always document – even when it involves (especially when it involves!) friends and family. A simple Memorandum of Understanding is also good enough for starters. You don’t need a lawyer at this stage – get a basic template from Google to get started. A formal agreement would need a lawyer though, to ensure that you have all bases covered. And of course, Noratise it. 

Your equity structure can include the founder pool, investor shares, stock options for staff, and phantom equity. Keep it simple enough though. 

Use share vesting plans (usually over 3-4 years) to encourage ongoing commitment from the founders. Keep some part aside for employees, as an incentive for working towards building the business. 

Also work  out an initial (and realistic) valuation of the business. 

Splitting the equity among founders can be tricky – you have to take in all cash and non-cash contributions into consideration.

Actual contributions matter, but use sound judgement as well. 

As always recommended – document and sign. 

Usually, contributions come in over time, so set a contribution window of 2-3 years. 

Also think about how to manage equity over time – to account for new joinees, and people who leave.

Your plan for change should also include founders who may leave the business, or stop contributing meaningfully over time. Return-of-equity terms can help here, and can be documented in the initial Memorandum of Understanding. 

Some people may even want to return – set fair terms for them too:)

Want to have an introduction to funding?

 

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