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What is the best way to structure your startup's equity for maximum value during an exit?

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If you are a startup founder, you probably dream of a successful exit that rewards your hard work and vision. But how do you make sure that you and your team get the best deal possible when you sell your company or go public? One of the most important factors is how you structure your startup's equity from the beginning. In this article, you will learn what types of equity you can offer, how to allocate them among your co-founders, employees, and investors, and how to avoid common pitfalls that can dilute your ownership or create conflicts.

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Michael Yeung, CPA

FP&A at Mistplay | SaaS & Adtech
Vittal Ramakrishna

Founder, CEO at Nucleo | Kreate | TEDx speaker | 1 Successful Exit | Early stage Investing | Ex-KPMG,BOSCH |…

1 Types of equity

Equity is the ownership stake that you and others have in your startup. It can take different forms, such as common stock, preferred stock, options, warrants, SAFEs, and convertible notes. Common stock gives you voting rights and dividends, while preferred stock gives investors certain preferences. Options are contracts that give the right to buy shares at a fixed price within a specified period, and are usually granted to employees. Warrants are similar to options but issued to investors or creditors as part of a financing deal. Finally, SAFEs and convertible notes allow investors to lend money to the company and convert it into equity later. All of these types of equity are used at different stages and for different purposes, to align interests with the company and incentivize employees.

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Vittal Ramakrishna

Founder, CEO at Nucleo | Kreate | TEDx speaker | 1 Successful Exit | Early stage Investing | Ex-KPMG,BOSCH | Ambassador GINSEP
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Equity is most precious when you realized you have parted with, a lot, later on. You always start with common stock,preferred stock, options for future investors,advisors,mentors and employees. Convertible instruments to help you navigate the current times against a future reward. Remember to always start with the lowest one to impact in future rounds first.

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2 Allocation of equity

Allocating equity among your stakeholders is a critical decision that can influence your startup's future value and culture. There is no universal formula, but some general guidelines to consider are: co-founders should agree on an equitable and transparent split of equity based on their contributions, roles, and commitments, with a vesting schedule to protect the company from a co-founder leaving early or underperforming. An employee stock option pool should be created, ranging from 10% to 20%, with a clear policy on how to grant options to employees based on their seniority, performance, and impact. Negotiate the terms and valuation of your equity deals with investors, being aware of the trade-offs between raising more money and giving up more equity. Advisors should be sought out to provide advice, connections, and feedback to your startup in exchange for a small amount of equity (usually less than 1%), with a written agreement specifying their roles, responsibilities, and compensation.

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Michael Yeung, CPA

FP&A at Mistplay | SaaS & Adtech
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Generally, keeping 100% of equity to the founders is the best way to ensure that the founders are rewarded for their hard work in building the company. So bootstrapping until the startup achieves and benefits from escape velocity is a great option. However, I do think that using equity as a means to bring in the right partners/investors into the business can help create tremendous value for the founders. Partners/Investors not only bring in capital, but also expertise and experience that can help grow the startup to new heights not previously imaginable. So, the answer can really depend on the future trajectory of the business. Should one want to earn 100% of a smaller value or lets say 40% of a lot of value. Both can be great choices.

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Vittal Ramakrishna

Founder, CEO at Nucleo | Kreate | TEDx speaker | 1 Successful Exit | Early stage Investing | Ex-KPMG,BOSCH | Ambassador GINSEP
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- Always hold Equity the most dearest - Equity against investments is usually the way - Equity for founders and founding team only - No equity for mentors and advisors - Look at creating option pools for advisors, mentors and employees - Look at other instruments to be used in first or/and second round of fundraising - If you are bootstrapped, do not even think of giving this equity to your dear ones as a gift - Everyone who gets equity must have a vesting schedule and a cliff post vesting. - Agreement for the Equity allocation between founders in mandatory

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3 Pitfalls to avoid

Structuring your startup's equity can be complex and challenging, and you may encounter some common pitfalls that can hurt your value or cause disputes. To avoid co-founder conflicts, you should have equal or clear equity splits among your co-founders and not give too much or too little equity to someone who joins or leaves later. When it comes to employee retention, you should avoid granting options that have unrealistic or unfavorable terms, such as a high exercise price or a short expiration date. As for investor rights, you should not give too much preferred stock to your investors or agree to terms that are too restrictive or unfavorable. Lastly, you should make sure to issue equity with proper documentation, valuation, and registration in order to comply with legal regulations and avoid violating the securities laws.

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Vittal Ramakrishna

Founder, CEO at Nucleo | Kreate | TEDx speaker | 1 Successful Exit | Early stage Investing | Ex-KPMG,BOSCH | Ambassador GINSEP
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- Vesting has to be included, including the founder himself/herself - Preferred stock for anyone other than founding team is not preferred - compliance and declaration of shareholding from time to time is needed as per laws of land

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Vittal Ramakrishna

Founder, CEO at Nucleo | Kreate | TEDx speaker | 1 Successful Exit | Early stage Investing | Ex-KPMG,BOSCH | Ambassador GINSEP
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- Always talk to senior folks who are building companies for pro bono advice - If there is an option of getting something from cash as against equity, do not hestitate to do cash only.

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What is the best way to structure your startup's equity for maximum value during an exit?

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1 Types of equity

2 Allocation of equity

3 Pitfalls to avoid

4 Here’s what else to consider

Startup Development

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What is the best way to structure your startup's equity for maximum value during an exit?

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1 Types of equity

2 Allocation of equity

3 Pitfalls to avoid

4 Here’s what else to consider

Startup Development

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