For a startup, equity is considered to be the lifeblood. There are various elements that need to be considered to develop a successful business like hitting & setting milestones, placing the right team in the proper place, and effective cash management. Similarly, it is crucial to grow your capital strategy and find out about founder shares. Since equity is precious, you cannot distribute it. At the same time, trying to be stingy will only not attract investors, advisors, and talents. Hence, it is crucial for your business plan to include a capital strategy.
Founder shares – Selecting the most appropriate business entity
With plenty of entity types to choose, it can be really confusing to select the best one. In case, you plan an equity business, then play structure to facilitate easy participation of stakeholders in stock sales. This in turn will provide you with predictability and flexibility.
Capital Structure – Know who & what
1. Founder’s stock:
It is generally issued at a low price and more about sweat equity. Based on unique skills, roles and responsibilities shared, split founder shares between founders. You may also want to know if equity is subjected to vesting right from day one, which is highly recommended by industry experts. A portion can also be designated to pre-invest to recognize the initial contributions of founders, which is quite reasonable.
2. Common stock:
Granted to early investors & Founders, with or without restrictions.
3. Convertible notes:
Investors may incur short-term debt by converting to A series of equity at about 20% to 30% discount in the form of compensation for risks taken during the early stage of the business. Convertible notes might come with a valuation cap or not to boost early investor participation with assured minimum equity percentage.
4. Preferred stock:
At different stages, it is sold in series and in different valuations. This stock can be converted to common stocks with varying rights. Liquidation preference is crucial or right to derive a specific amount before a liquidation event among common stockholders.
5. Service providers:
Fees of some part will be required to be paid to a few investment banks in equity, while some service providers and law firms may accept it as payment instead of cash. To improve overall performance, equity is considered to be a wonderful tool and is accounted for as shared risk. However, it should not be overdone. The amount discussed here is around 5 percent.
Doing some research on founder shares is sure to give you some idea about it.