Startup Equity & Vesting: How to Compensate Team Members Without Money

It’s an issue that can lead to big problems in a company’s future if not properly aired. For many high-tech startup companies that intend to hire employees and raise capital, the sweet spot is around 10 million shares. Authorized unissued shares are shares that have been authorized but not yet issued or otherwise allocated. In many states, the number of shares authorized can determine how much a corporation pays in franchise tax.

• Typically, founders might initially issue themselves between 6 and 8 million shares, leaving the rest for future employees, advisors, and investors.
• There’s no need for rules because the number, practically speaking, doesn’t matter.
• New founders often have questions about utilizing equity, and understandably so.
• This article from Stock Based Comp has a useful breakdown of tax conditions for stock options in different European countries.

New founders often have questions about utilizing equity, and understandably so. Navigating valuations, equity pools, distributions, and more can be challenging. While it’s important to consult a financial expert in any decision-making, understanding the basics of how equity works can help you get started.

Creating a Share Structure for Your Startup

Once you have determined your allocation of shares, you will also need to determine how many shares to authorize and how many to issue. Authorized shares are the maximum number of shares that you are permitted to issue. Vesting ensures that co-founders (as well as key employees, etc.) stay with the firm long enough to justify the equity they will receive in the company.

You may also leave some available pool (say 5%), but don’t forget to allocate 10% to employees. It makes sense to define roles within the company and assign job titles based on the most outstanding skills of co-founders. It’s also worth mentioning that while distributing the responsibilities, startuppers should think about their long-term expectations. It means that you need to figure out the future of your career, potential responsibilities & risks. Restricted stock grants give stocks to employees outright when a certain restriction—like time employed or a bonus earned—is lifted.

How many shares should be authorized in the certificate of incorporation?

Simply put, a stock option is a right given to an employee to buy a certain number of shares in the company’s stock. Private companies, and especially startups, frequently use a stock option plan to reward their key employees. You might consider 10% of your startup equity for the most dedicated employees.

It is important to note that the issued shares cannot be more than the authorized shares. There is no one-size-fits-all answer to the « how many shares should a startup company have » question. how many shares should a startup company have? However, because there are many use cases for the shares, you should have enough shares at the start of your company. For a robust understanding, we will examine why startups need shares.

Do Companies Reveal Their Total Number of Shares?

Warrants may use shares set aside in the pool, but they are typically “one-offs” and are not included in the stock option plan. Warrants tend to be issued as a form of currency in business transactions. These shares — often referred to as simply “the pool” — are reserved for later issuance by your startup when stock options are purchased. These are often included in a compensation package for employees working in the startup. It illustrates how to factor in pre-money valuations in each round, dilution based on the amount raised, and the probability of success/failure at each stage. When an employee exercises their stock options, they are buying shares of the company at a set price.

Navigating equity decisions is just one of many new areas that startup founders need to learn about on their journey. The default for many co-founders is a 50/50 equity split, but that’s not always the best option. Equity splits among co-founders can https://personal-accounting.org/checkeeper/ be even, but they can also have senior controlling partnerships, where there’s a 60-4 split or something similar. Having frank discussions about the level of risk for co-founders, their level of commitment, and their long-term impact is important.

Your lawyer or other business advisors can address your specific needs and help you along the way. ☝️ One more question you never have to ask yourself when you use Capbase. We make it easy to divide shares among co-founders, employee stock plans, and investors—and keep track of who owns what.

But like the many challenges you’ve faced along the way, this is just one more hurdle to overcome. While valuation is more art than science, entrepreneur and author Mike Belsito writes that there are some general things you should keep in mind. In this (admittedly contrived) example, BookFace and Moogle’s offers are both “worth” the same amount. Tom Taulli of Business Week says that in Hiring the Right Lawyer When Raising Capital « [S]ome startup attorneys have incredibly valuable blogs, such as Yokum Taku’s Startup Company Lawyer … » As a startup, one of the most important things you can do is to focus on your goal.

With all of the above decisions complete, you will need to record them. A cap table is a spreadsheet that keeps track of the company’s ownership percentages, stock dilution, and equity value in each round of investment. Option pool shares are not issued before the corporation awards options, these options are approved by the board of directors, and they are vested and exercised by the option grantee. Anti-dilution rights can protect investors from their percentage of ownership interest shrinking dramatically in the event of a drop in valuation, or down round. A drop in valuation is generally a negative outcome for a company, and investors tend to hope that their anti-dilution rights never have to kick in. When it comes to co-founders, vesting can get extra tricky, as splitting equity can, and often does, ruin a business partnership.