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Imagine the following- you start your venture, the business gains a lot of momentum, and you bring an all-star team to help you build your startup. In exchange for their services, you think of offering them some share of the company. But what is equity all about?
The easiest way to understand the term “equity” is to think of it as a pie. There are only limited pieces of the pie that can be divided and shared. The value of each piece of pie increases as your business becomes more successful. If you are a startup owner, you have a 100% share of the pie (equity). If you want your startup to become more valuable, you must be willing to forfeit some pieces of the pie. To keep everyone happy in your startup and retain ownership of your business, it is important to plan equity distribution efficiently and make sure the legalities are taken care of from day one.
To understand equity further, here is a deep dive into the subject.
Who Gets Startup Equity?
The most important aspect you need to understand about your startup is who all are worthy of your startup equity. If you are the sole founder, you get to keep 100% of the equity. The people who invest time, effort, and money in your startup are the ones with whom you might have to eventually divide the equity with. Let us see who they are.
Co-founder
If you have a co-founder or multiple co-founders, determining how the equity should be distributed among the parties is a crucial decision.
Friends or Family
If you have taken financial support from your friends or family who might have substantial future intervention in your business, it is important to decide whether you want to give a share of your company to them.
Early Investment from Third Parties
Investors are people or organizations that put money into financial schemes, property, etc. with the expectation of achieving a profit. Investors invest capital in your startup to get better ROI, and if your startup is growing and bringing better inflow, investors are bound to gain benefit from it.
Other Stakeholders
The other relevant stakeholders for your startup equity can be advisory board members or industry experts who provide strategic direction to your startup. These are the parties who are often compensated with equity for their services in return.
There are also other stages in your startup where you might have to give away a stake from your business. Series A, B, C, etc. funding rounds often involve a transfer of equity to the stakeholders.
How to Begin Investing in Equity?
Committing to the act of distributing your share of equity is a major decision. Hence it should be entered into with great thought, consideration, and planning. Here is how you can begin.
Be Disciplined and Have a Plan
Although this might sound like advice from a life coach, as a founder, you need to chalk out a plan or a roadmap to mark important people who can be your company’s equity holders. If you are looking for first-time investors or a mentor who has your best interest in mind, it is better to focus on your short-term and long-term goals equally.
Keep a Track
Some entrepreneurs might just settle with the thought of introducing investors to the business and then forget about it. However, as a novice entrepreneur, you need to keep track of your equity shareholding and distribute the shares thoughtfully.
Do Your Own Research
As a first-time business owner, it is important to follow a safe path and do your own research before looking for investors and shareholders for your venture. It is prudent to do extensive research about how the equity market flows and take help from a financial advisor if required.
Diversify your Investments
Do not put all your eggs in one basket - the rule is pertinent when it comes to investing. It is important to explore more lucrative investment options to keep your portfolio updated and growing.
Bottom Line
By understanding even, the smallest rule of equity distribution and educating yourself about the current market situation, you are giving yourself a higher chance of success in growing your startup.
The next step? Decide exactly to whom you want to award equity. It gets easier when you understand and take that first step towards sharing your equity with the right people. If you are a startup looking for various growth opportunities, explore the numerous benefits that the Startup India platform offers. Register your startup with DPIIT (Department for Promotion of Industry and Internal Trade) and get ample benefits to help your startup scale.
