Key Takeaways
- Equity splits among founders determine the relative ownership of a startup in its early stage.
- Salary replacement, ideation, qualifications, time of joining, and seed funding contribution should be considered when deciding how much equity to grant co-founders.
- Equity splits should be set up with an accompanying vesting schedule.
Full Text
Equity is a non-cash compensation option that translates to partial ownership in a company. It is often given to founders and other financial supporters. There are several things to consider when deciding whom to grant equity to, and how much to grant them. These considerations are discussed below.
Equity can act as a salary replacement. Oftentimes, people who found startups or join them during very early stages work for a low salary–or no salary at all–in exchange for a stake in the company. The extent of a co-founder’s contributions should also be considered. Some may have greater skills, dedicate more time to projects, or carry out more integral work which may correspond with greater equity.
Additionally, those who join during the earliest stages of a company often receive larger pieces of equity. Founders who provide seed capital also typically receive equity with respect to both their work and their capital contributions separately. Past contributions and qualifications should also be considered. One can look at a founder’s network and prior professional experience, their development of important IP, their past presentations to investors, etc.
Once the amount of equity is determined, a vesting schedule should be established. Vesting is important for a number of reasons. First, it gives the company and its cap table a certain amount of security should a founder exit during the vesting period. Second, it demonstrates to venture capitalists and other potential investors that a company’s founders have a mature understanding of equity splits and conditions, and likely other startup fundamentals as well.
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