A simple explanation of startup equity and how it works
Equity is a key part of raising money for a startup. Find out what it is, how it works, and how you can use it to help your company grow.
What is startup equity? Lets try and break it down. Startup equity basics is that it's an agreement over how to allocate ownership of the business. Startup equity can apply to anyone before or after a business has been incorporated as long as there is an agreement in place. However, its also important to note that startup equity can also apply in relation to cofounders, employees and investors.
Equity is one of the issues when you try and set up a startup model with your cofounders, but not only for you and your cofounders, but also your staff and investors.
What is equity in a startup
When you join a startup, you might get equity in the company. That's not just an incentive for you to work harder — it can also be an investment that pays off later on. You often hear about startups offering their employees stock options as part of their compensation packages.
But what exactly is equity? And how does it translate into real money? It's important to understand how startup equity works before you sign on the dotted line. Otherwise, you may end up with nothing after years of hard work.
Equity vests over time, not all at once
Startup equity is one of the most important concepts in startups, but it's also one of the most misunderstood. Here's a simple explanation of how startup equity works—and why it's so important for founders. Startup equity is a way for founders to compensate each other for their contributions to the company.
It's not ownership: No matter how much equity you own, you can't sell your shares or take them with you if you leave the company. Equity vests over time, not all at once. A vesting schedule is a contract between co-founders that specifies when they will receive their shares. When someone joins your startup as an employee, they usually don't get any equity until after they've completed their probationary period (if there is one).
The same goes for founders who join later on in the life of their startup; they won't receive any shares until after several months or years have passed and they've proven themselves valuable members of the team (and hopefully still want to be part of it).
How vesting works for early employees
Startup equity is what you get when a company decides to compensate you for your work. It can be one of the most important financial decisions you make in your life. If you're thinking about joining a startup, or if you're already working for one, then understanding how equity works is essential.
Here's an explanation of how vesting works at early-stage companies. What is startup equity? Startup equity is the amount of money that an employee gets from their employer as part of their compensation package. (This is distinct from stock options, which are essentially just promises to give employees equity later on.) How do startups pay their employees? There are two main ways that startups pay their employees: salary and stock options.
Salaries are simple; they just come out of the company's bank account every month. But determining how much stock to give someone can be tricky, because it depends on many factors: How valuable do you think this person will become to the company? How long do they have left on their contract? What else can we afford to give them right now? And so on...
What about founders equity
When you start a new business, you might be tempted to give yourself 100 percent of the company. But doing so could come back to haunt you and the other founders if things don’t work out. That’s because equity is one of the most important ways founders can motivate themselves and their teams to take a risk on a new venture that could fail.
Equity matters because it gives employees an ownership stake in the business they work for. Equity compensation usually takes the form of stock options or restricted stock units (RSUs). As long as you have equity, you have an incentive to help make your company successful — because if it succeeds, someone else won’t get your slice of the pie.
Equity also helps investors by creating incentives for founders and employees not just to build something people want, but also to build something that will generate returns for investors over time.
Startup equity is a crucial—maybe even the most crucial—aspect of being a co-founder of a startup. It's good to know how it works, and to understand its significance. But just as there are no guarantees in life, there are also no guarantees in startup equity. You're taking a risk when you decide to work with founder stock, but if you don't, you might not be taken seriously by potential investors.
About the author
🤓 I am an entrepreneur who builds brands/influencer. And I want to chat with anyone that is interested in starting their own business/brand or who wants to take it to the next level! You can message me anytime!