Equity represents ownership in a company, typically expressed as shares or percentage ownership. In startups, equity is used to compensate founders, employees, and investors. Equity holders share in the company's success (or failure) and may receive dividends or proceeds from a sale.
Equity is the currency of startups. Understanding how equity works is crucial for founders negotiating with investors and employees evaluating job offers.
Types of Equity: - Common Stock: Standard ownership, held by founders and employees - Preferred Stock: Investor shares with special rights (liquidation preference, anti-dilution) - Options: Right to buy shares at a set price - RSUs: Restricted Stock Units, granted after vesting
Equity for Founders: - Founders typically start with 100% (split among co-founders) - Each funding round dilutes founder ownership - After Series C, founders often own 10-25% - Vesting protects against co-founder departures
Equity for Employees: - Startups offer equity to compensate for lower salaries - Options typically vest over 4 years with 1-year cliff - Exercise price set at Fair Market Value (409A valuation) - Tax implications vary by equity type and jurisdiction
Cap Table Basics: A capitalization table tracks all equity ownership: - Who owns what percentage - Share prices at each round - Option pool allocations - Fully diluted ownership
Key Terms: - Dilution: Reduction in ownership percentage from new shares - Liquidation Preference: Investor right to get paid first - Cliff: Period before any equity vests