Equity

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