Notes

Startup Equity Issues
What is founders equity? Is it an investment in the future of a business? What about a company with which I am already involved? This is a common question among investors and entrepreneurs. There are two basic answers to this question, and there are some things you should know before investing in a startup.

founders equity, refers to the shares that a founder or a founding team member receives when they join or find a new company, e.g., a technology business. Equity is usually created when the business issues its first stock to the founding members. Once you become one of the founding members, then you will hold stock, commonly called common stock, which indicates that you now own a large percentage of the company, called the equity of the business. So, as one of the investors, what will happen to my ownership?

Usually, the more common stock issued, the more the dividend. That means that the more investors you have, the larger the percentage of a company you receive. When we speak of "common stock", we are talking about stockholders; that is, shareholders that own a significant portion of the company. The company may issue a lot of common stock to a large number of people, and then give them different but equal shares. That's why most of these companies have "credited" partners instead of individual shareholders: the partnership allows the partners to participate in the funding and growth of the business, while maintaining their ownership interest.

To understand how your ownership will affect your access to future capital, you need to know what "founders equity" means. Essentially, this refers to the difference between the value of your shares at the time of your purchase and the value you would receive should you become a co-owner. The company may issue limited liability company shares to the partners in return for their investments.

There are two types of founders equity either time-based or performance-based. Time-based vesting gives new investors a right to a portion of the profits from the business every time a new product is sold. This part usually takes the form of restricted shares or preferred stock. If you become a part of a startup equity program, your ownership will be based on your performance. The downside of this is that if you don't perform well enough in a given year, you can lose your investment; if you do well, however, your stake increases.

Performance-based vesting is a bit trickier than time-based vesting. A performance-based clause will be included in the original agreement between the investor and the founder(s). In order to receive full value of your shares, you must meet a set of standards although this typically varies according to the type of business that you are investing in. This type of equity requires that the co founders perform under a strict set of guidelines which are often set in place by the company itself or by an outside board. This means that if you fail to meet the guidelines for one year, you lose your invested amount.

It's important that when you are looking for startup equity you choose the right company, with the right type of offering. Choosing a company based on reputation alone isn't always a good idea; although, you want to consider experience and track record. If an investor is willing to put in the time and effort to help you find the best deal, the deal will most likely be a good one, but this doesn't mean that it won't fail. You should consider an investment with a well-established management team and strong ties to the industry that you are investing in. You should also make sure that your equity has room for growth; if your potential funding isn't enough to allow for that growth, you will have to look for additional capital to add your employees and acquire additional assets. It's often a good idea to take a year to two years to build your equity, since you don't want to be tied down to any specific type of startup during this tumultuous time.

One other type of startup founder equity is referred to as the 'lost founder' clause. This refers to a situation where you, as the founding leader, have already left the company, either due to the turmoil (i.e. staff firings) or simply out of respect for your position. While your stake of the company is diminished, so is your liability. This means that although you may still have a significant portion of your equity in the company, you may no longer be able to exercise all of your rights to bring up questions or concerns regarding management issues and possible disputes between you and other investors, etc.
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