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.
As always, should you have any questions about anything contained within this Insight, don’t hesitate to get in touch with us via call, text or e-mail using the contact details listed in our site footer, or via the form below.
Disclaimer: Please note that the information provided in this blog post does not, and is not intended to, constitute legal advice. Rather, all of the information, content, and materials available on this and every other page of our website is made available by us for general informational purposes only. The information in this post or anywhere else on this website may not constitute the most up-to-date legal or other information, and should not be relied upon for making any decision, acting, or refraining from acting. All liability on the part of Chatterjee Legal, P.C. and any and all of its attorneys and/or other professionals with respect to decisions made, actions taken or actions not taken based on the contents of this blog post, this page, or this website is hereby expressly disclaimed. The contents of this blog post, this page and this website are provided on an “as is” basis, and no representations are made that such content is free from errors. Our content contained within this post or elsewhere on our website may link to websites, content or other resources belonging to third parties. We present these links only for convenience purposes, and we make no representations or warranties of any kind with respect to any such third-party websites, content or other resources. Access to and/or use of this blog post, this page, or this website does not create an attorney-client relationship between you and Chatterjee Legal, P.C. or any of its attorneys or other professionals.