What is the best practice for distributing startup equity?

Startup equity refers to the ownership stake that individuals or entities have in a newly established company. It represents a share of the company's value and is usually divided into units known as "equity shares". The purpose of startup equity is to attract talented employees, raise capital, and align the interests of different stakeholders towards shared objectives.

Think of startup equity as a pie that represents the complete ownership of the company. As the company grows, this "equity pie" gets divided and distributed among different individuals and entities involved with the startup.

One possible approach is to divide all equity shares equally among stakeholders. Each of them receives a slice of the pie based on their contributions, roles, and affiliations with the company.

The key stakeholders who typically receive startup equity include co-founders, employees, advisors, and investors.

🤓 For co-founders, it's advisable to have transparent discussions and documentation regarding equity distribution early on. Co-founders usually receive a significant portion of the initial equity based on their roles, responsibilities, and contributions.

😎 Employees can also receive startup equity as an additional incentive, especially if their initial compensation falls below market rates. The allocation of equity to employees is typically based on their role, seniority level, and salary.

🤔 Advisors play a critical role in guiding startup teams and may receive equity in exchange for their expertise and industry insights. Clear terms and expectations should be established for equity arrangements with advisors.

🤑 Investors, including angel investors, venture capitalists, and crowdfunding supporters, provide financial backing to startups in exchange for equity grants. The terms and equity share are defined in investment agreements, which may also specify any rights or preferences associated with the issued equity shares.

So there you have it: a starting point for figuring out how to award precious equity to yourself, your co-founders, your investors, advisors, and employees.

And if you want to learn more about startup equity, its types and how to manage it when scaling, check out the full article 👉 https://www.upsilonit.com/blog/startup-equity-and-how-it-works