Monday, January 19, 2015

#Startups: Planning your Equity

Equity planning is one of the most challenging issue for a startup. This is a layman's understanding of how we can classify and plan these equity types early on. The equity planning has three major categories - Founder's equity, Sweat Equity and Investor's Equity ( FE, SE and IE) respectively.
Founder's equity - is the initial equity of the founders. These equity's are planned and vested for a particular period of time. This ensures that everybody puts in their tenure and don't let early exists affect the organization's valuation. The lock-ins and the vested period play a very important role in protecting fellow founder's interests as the organization grows. Normally, this falls between 65 to 80% of the organization's shares.
Second is Sweat Equity. This type of equity is kept for the key contributors who's skills and experience are needed for setting the company in terms of setting up and running - technology or operations. Mentors, Consultants and other employees are few of them. Here, the normal reasons are two: to create a sense of ownership or to compensate fees or salaries.
The third type of equity is called the Investor's equity. This is given out in lieu of investments. At each round of investment, there is valuation, and equity is divested for exchange of capital. The first few rounds, matter. When, why and how much the investments are needed depends on both valuation and need for capital.
Generally, the second and third put together account for about 20-35%. But how this is divested will depends on the planning and execution between the founders. Normally these are vested with the founding team and divested to the two categories as time rolls along.
- Ashok Subramanian
Ashok Subramanian is a Startup Mentor and Entrepreneur. He also is a Marketing, Branding and Content Evangelist.

( C) Cherunathury Tech Ventures 2014