So how do you decide the best way forward? How do you decide on an approach to divide the equity of a start-up from the beginning that best positions you for the future? This example aims to show how a company could structure its equity allocation. Remember that your company`s ownership shares should reflect its uniqueness, needs, and business strategy. Start-up phase – Usually, co-founders or employees who join a company in the early stages of development (before the start-up round, before Series A financing, etc.) earn a larger share of capital to reward them for their investment in time and risk-taking. What happens if all first employees do not have to accept a salary? Often you have a founder who has saved a little money, so she decides to leave for a while without pay, while the other founder who needs the money takes a salary. It is tempting to give more shares to the founder who managed without payment to compensate. The problem is that you can never find the right amount of shares to give. This will only lead to conflicts. The price of a share is also affected by a stock split. After a split, the share price is reduced (as the number of shares outstanding has increased). In the example of a 2:1 split, the share price is cut in half.
Although the number of shares outstanding increases and the price of each share changes, the company`s market capitalization remains unchanged. In June 2014, Apple Inc. its 7 for 1 shares to make its shares more accessible to a greater number of investors. Just prior to the split, the opening price of each share was approximately $649.88. After the spin-off, the price per share at market opening was $92.70 ($648.90 ÷ $7). The short investor will have made a profit of $500 (money received on the short sale ($25 x 100), less the closing cost of the short position ($10 x $200). That is, $2,500 – $2,000 = $500). The entry price for the short was 100 shares at $25, which equates to 200 shares at $12.50. Thus, the shorts made $2.50 per share on the 200 shares borrowed, or $5 per share on 100 shares if they had been sold before the split. For example, a 4-year lock-up period usually means that the person receives 25% of the shares given in the first year, 25% in the second year, etc. In addition, various conditions can be defined.
One of the most common conditions is that the employee must stay in the company. Thus, if the employee leaves at the end of the first year, she receives only 25% of the shares. The individual contribution of each person to the intellectual property of the company. So you don`t have a dividend or voting rights until you become a shareholder by converting your options. As a rule, option holders decide to convert only in the event of an exit. At this point, the options are converted immediately before the sale, after which the shares are sold with the rest of the company. One of the main reasons not to go down this path is the impact on your taxes, which are highly dependent on your country`s tax system. The founders are expected to end up with about 50% of the company in total. Each of the next five shifts should end up representing about 10% of the company and be distributed equally among all members of the shift.
There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, direct and, most importantly, fair, will make your business much more likely to succeed. A stock split is mainly used by companies whose share prices have risen significantly. Although the number of shares outstanding is increasing and the price per share is decreasing, the market capitalization (and the value of the company) does not change. As a result, stock splits help make stocks more affordable for small investors and offer greater tradingability and liquidity in the market. In this scenario, the company (most likely the board of directors) must approve all share transfers. This allows for an orderly and structured sale for all parties involved. My advice for dividing shares is probably controversial, but that`s what we`ve done for all my startups and what we almost always recommend at YC: equal shares between co-founders.  These are the people with whom you go to war. You will spend more time with these people than with most of your family members. These are the people who help you decide on the most important issues in your business. After all, these are the people you`ll celebrate with if you succeed. As Instagram`s Kevin Systrom says, “You should just try to be as fair as possible to the stage of the company you`re in.” For Kevin, sharing startups` equity is something that should be reconsidered often, while always aiming to be fair and generous.