How to distribute equity to your startup business

Byshelli davis
How to distribute equity to your startup business-4730c12d

Even though numerous vital assets exist in a business, equity is the most important of the various startup resources. Equity holds numerous features and powers, which is why it is the most critical start resource, especially in a new and developing business. Several helpful tools, like the startup equity calculator, assist in tasks like sorting out equity distribution. Given the importance that equity holds in a company, it can be quickly concluded that unfair distribution of equity can cause sour and bitter workplace relationships. To avoid any ripple effects that such actions can cause, it is essential to find a proper solution and method for calculating fair equity shares for every investor, founder, co-founder, and other people affected. 

Finding the right solution to distribute equity for your startup business is essential for numerous reasons. Furthermore, there can be different solutions depending upon your company structure and the stage of development at which your company is at a given point in time. This makes it essential to go over the options and assess which solution works best for you. Some of the ways to decide upon equity distribution for your startup business are as follows. 

Ways to distribute equity in your startup business.

Before deciding on the perfect formula for dividing equity in your startup business, decide who all receive an equity share in the business. Some businesses offer equity shares to: 

 

 

You would think that equity is not something to be shared with employees. However, a lot of big conglomerates like Google offer company shares as well to new employees as part of their employment compensation package. Granted, this amount is meager, but it has a significant impact on the employees. Since their personal interests also lie in the success of the company (beyond getting regular salaries and perks), they are more proactively engaged with the company’s affairs. 

In addition to deciding on the parties which will receive equity benefits, it is also essential to assess what kind of shares they would hold. Preferred equity stock and Common equity stock are the two main types of equity in a startup business setting.

How to distribute equity

If you look at online tools like the  , you will see that the tool asks for numerous details like the designation of the person, their contribution to various aspects of running a startup business in today’s world, their investment, their experience, etc. In addition, some calculators would also ask questions like which individual has contributed the most in certain specific situations pertaining to company formation. Using this information can help in understanding the ideal solution for equity distribution. However, one crucial thing to understand is that while an individual may have contributed less than another during the early stages, they may end up being more valuable in the future. Thus, assessing every individual’s current, as well as prospective value, is essential. 

For instance, when it comes to companies with multiple founders and co-founders, two standard methods are used to distribute equity. 

  • Either all of them decide to share equity equally to avoid any conflict arising from discussions about a fair breakup. 
  • They distribute equity based on the currently limited information like individual experience and how important a role each of them has played so far. 

Both these methods are flawed for a variety of reasons. Primarily, it is essential to discuss fair equity distribution instead of equally distributing to avoid conflict. This is because while the initial thought can be to avoid conflict, as work piles up and one individual contributes more than others, heated debates and discussions can arise. 

Regarding the second method, it is essential to note that the current level of experience and contributions are not the only two parameters needed to calculate a fair equity distribution. It is essential to assess the future expansion of each founder to the company as well. How big the particular task or department can become in the prospective future is vital to assess how crucial and elaborate the role of an individual founder can be. 

When it comes to investors, deciding on their equity share is more of an internal discussion among founders and co-founders. These parties in the company are obligated to discuss how much equity they can give in return for an investment. Investors come in various forms. They can be your friends and family members, venture capitalists, and angel investors. Coming up with a fair share of equity for these parties is essential as they deserve a piece of the profits that roll in as a result of their investments. Deciding what value is fair depends on many factors, including the following: 

  • The company’s valuation at the time of raising funds from an investor. This is essential, making periodical or pre-fundraising company valuation vital. 
  • How much investment is the business seeking, and can it justify a particular percentage of equity as fair for the asking amount? 
  • What skills is the investor bringing to the table? While some investors only like to invest their money and reap the benefits, others also offer their particular expert services in addition to the money. Things like expert guidance in a particular field (marketing, for example), helping with connection building and networking, and so on. These investors delve deeply into the company’s affairs, and you are basically paying them for their investment and their time and efforts. 

Finally, deciding the equity share of advisors is crucial. These are members who provide guidance and assist in the formulation of strategic tactics during the early development stages of the company to help it develop quickly. In addition, they provide invaluable insights and expert solutions to the various hurdles and obstacles a company faces during the early establishment phase. They are thus compensated through equity in order to repay them for their services.Tackling these categories of interested parties would help simplify the task of distribution of equity. First, however, deciding parties need to make rational decisions while setting an upper offer limit and a lower offer limit to the equity offered.