how can i assign equity in my startup without a lawyer

What happens to equity when someone leaves a startup?

If the person leaves the startup before the first year has been completed, they relinquish all equity they have vested. On the other hand, if the startup leaves before all shares have vested, they all immediately vest by default.

Should startups offer equity to founders?

But not every startup is going to offer equity to employees; not every startup is going to offer equity to advisors; and not every startup is going to take on investors. But it’s a fair bet to say that every startup is going to have to figure out how to structure and portion out equity to the founders of the company.

How do you divide equity in a startup company?

Dividing equity within a startup company can be broken down into five simple steps: Divide equity within the organization. Divide equity among company founders. Allocate money to investors. Divide the option pool into three groups: board of directors, advisors, and employees.

How much equity should a startup advisor get paid?

Entrepreneur and executive advisor Kris Kelso points out that, like so many things in the startup world, there are no strict guidelines for assigning startup equity compensation to advisors. However, he says 0.5 percent and 1 percent is a good range to consider, vested over one to two years.

How do I allocate my startup equity?

Dividing equity within a startup company can be broken down into five simple steps:Divide equity within the organization.Divide equity among company founders.Allocate money to investors.Divide the option pool into three groups: board of directors, advisors, and employees.Create a vesting schedule.

How equity is distributed in a startup?

Startup equity refers to the degree of ownership stakeholders have of a company. This typically refers to the value of shares that founders, investors, and employees are issued. As a founder, you want to make sure sharing ownership of your business is done thoughtfully and productively.

How do you divide ownership in a startup?

The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the company, split equally among everyone in the layer. Example: Two founders start the company.

How much equity should I give early founders?

Employee option pools can range from 5% to 30% of a startup's equity, according to Carta data. Steinberg recommends establishing a pool of about 10% for early key hires and 10% for future employees. But relying on rules of thumb alone can be dangerous, as every company has different cash and talent requirements.

How do you distribute equity among founders?

SummaryRule 1) Try to split as equaly and fairly as possible.Rule 2) Don't take on more than 2 co-founders.Rule 3) Your co-founders should complement your competencies, not copy them.Rule 4) Use vesting. ... Rule 5) Keep 10% of the company for the most important employees.More items...•

Is 1% equity in a startup good?

Q: Is 1% the standard equity offer? 1% may make sense for an employee joining after a Series A financing, but do not make the mistake of thinking that an early-stage employee is the same as a post-Series A employee. First, your ownership percentage will be significantly diluted at the Series A financing.

What is a fair percentage for an investor?

But what is a fair percentage for an investor? When it comes to angel investors, the general rule is to offer approximately 20-25% of your business earnings. If you're selling the business in its infancy, this is the amount that investors will expect in returns.

How do equity holders get paid?

In plain English, that means that every quarter the company will take a segment of its profits, split it up and give those profits to stockholders according to how much stock someone has. The more profit the company makes, the more money the stockholder gets paid at the end of the quarter.

How do you divide founder equity?

In a dynamic equity split, the amount of equity each co-founder gets depends on the amount of capital or time they invest into the company. That amount resets monthly and there's a predetermined formula used to decide how the equity should be doled out. Businesses are often works in progress.

Do founders pay for their shares?

And the answer is pretty simple – it's yes. Founders must pay for their own stock under corporate statutes like the Delaware General Corporation Law, Section 152. When a corporation issues stock to a founder, the stock must be what's called “fully paid and non-assessable”.

How much equity do I need to offer a CTO?

CTOs want a tech salary and a fair amount of equity. Co-founders—be ready to part with a sizable amount of equity (up to 50%).

What is startup equity?

Startup Equity Dictionary. (All definitions are from Google’s dictionary, unless otherwise linked.) Equity: “the value of the shares issued by a company.” “one’s degree of ownership in any asset after all debts associated with that asset are paid off.”. Exercise shares: to choose to buy or sell your shares in a company.

Who gets bigger in startup equity?

While there are different categories of investors — family members, angels, and venture capitalists being just three that spring immediately to mind — it’s fair to say that generally investors are going to get a bigger piece of startup equity than advisors and employees, if not bigger than the founders.

Why do startups invest money?

That’s because their main role with a startup is investing money into it. In exchange for the risk of contributing that money, investors are hoping for a large reward.

What to do once you decide on your valuation?

Once you’ve decided on your valuation of your company, you’re ready to go into talks with investors. They’ll most likely have a different valuation that they’ve worked out as well and that’s when the negotiation starts. Ultimately, the goal is to work out an agreement about startup equity that works well (enough) for you both.

How to get great employees if you can't pay them?

But how do you get and retain great employees if you can’t pay them? By offering a stake in your company. Offering startup equity to early-stage employees makes up for that gap; motivates them to work harder, because they’re now part-owners of your company; and retains them if you choose to vest their stock over a four year period, which is common.

How is equity compensation determined?

More likely than not, the amount of equity compensation an investor gets will be determined by conversations you have with them as you’re negotiating their investment. But in order to get the most out of that conversation as possible, you have to go in with an idea about the valuation of your company.

What is stock option?

Stock options: “a benefit in the form of an option given by a company to an employee to buy stock in the company at a discount or at a stated fixed price.”. Shares: “a part or portion of a larger amount that is divided among a number of people, or to which a number of people contribute.”.

How to understand startup equity?

The easiest way to understand startup equity is to think of it as a pie. There is a finite amount of the pie that can be divided and shared. However, the worth of each piece of pie can increase as your business becomes more successful. If you, as a founder, own 100% of your business, you own the entire pie.

What is startup equity?

Startup Equity. Startup equity refers to the degree of ownership stakeholders have of a company. This typically refers to the value of shares that founders, investors, and employees are issued. As a founder, you want to make sure sharing ownership of your business is done with intention and care. The easiest way to understand startup equity is ...

What factors affect equity distribution?

As we touched on earlier, startup equity distribution varies based on factors — including timing, business model, industry, CEO preferences, and number of stakeholders involved. There's no definitive, "this the only way this happens" model for the process. Still, there are some trends and relatively consistent figures that characterize a typical startup's equity distribution.

Why should employees have equity?

Ideally, employee equity should incentivize employees to stay with your company and contribute to business growth and success.

How much equity do advisors get?

However, many companies offer 0.2% to 1% equity to their advisors. As you form advising partnerships, you’ll want to clearly set expectations with advisors early on so they know how big ...

How long does it take to vest equity?

The most common timeline is a four-year vesting schedule with a one-year cliff. This means an employee can begin vesting their equity after a year of being at the company. After their first year, they will own a quarter of their equity grant, with the remainder vested on a monthly or quarterly basis.

What is the beauty of being a business owner?

However, a lot of the beauty of being a business owner is in the lessons you learn and the adversity you overcome. You’ve taken on plenty of challenges as you've grown your business — distributing startup equity is just another one to figure out.

Why do startups need lawyers?

Startups need legal support and often rely on lawyers to provide them with legal expertise in areas where they may not be well versed. Startup lawyers are familiar with the requirements, regulations, and laws surrounding the practices of establishing and running a business. They can help you with a variety of general and specialized legal issues ...

What can a startup lawyer do?

Startup lawyers can help you understand the complexity surrounding incorporating, choose a business structure, choose where to incorporate, and make sure everything is in order when you are ready to incorporate your startup.

What is the best way to ensure that your business is compliant with federal laws?

Depending on your industry and the nature of your business, you may need to consider consulting an attorney specializing in corporate compliance to ensure that your startup is compliant with federal, state, and local laws, rules, and regulations.

Can an employment lawyer help with NDAs?

Getting them wrong can end up being very costly for your startup. Lawyers that specialize in employment law can help you understand workplace laws, craft NDAs, draft employment agreements, settle employment disputes, and ensure that you are compliant with the laws and regulations that apply to your business.

Employees vs Advisors

A handy way of paying people without spending any money upfront is by issuing them with equity. Startups often do this to compensate employees, contractors, co-founders and directors. Payment through equity is usually via an employee share scheme or option plan.

Expensive Fees Now vs Very Expensive Fees Later

You may find yourself with a large bill after engaging with a professional advisor. However, it is not a good idea to save finances in the short term by sacrificing equity in your startup. If and when your startup eventually takes off, even a small percentage of shares will be worth a lot more than initial accounting or legal fees.

Does It Ever Make Sense to Do It?

It may be a good idea to have a trusted advisor who you can rely on to devote their time and attention to your business. This will depend on the industry your startup is in or the types of goods or services it provides.

Key Takeaways

Professional advisors have a different relationship with your business to employees or co-founders. You should think carefully before you pay an accountant or lawyer with shares. Paying these sorts of advisors in equity is not necessarily going to motivate them to perform their work any better or provide you with a different outcome.

Typical Startup Equity Distribution

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Founders and Co-Founders

Employees

Investors

Advisors

Incorporation

Founders’ Agreement

Confidentiality Agreements

Intellectual Property Protection

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Hiring Employees

Issuing Or Transferring Stock

• You should consider hiring an attorney when you decide to issue new stock or transfer stock. When you issue new stock, you need to comply with your startup’s articles of incorporation and shareholder’s agreement. You also have to comply with any state and federal securities laws that apply to your state. A lawyer that specializes in capital markets...

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Raising Funds

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