Understanding Equity: A Simple Guide for Startup Leaders

Starting a tech business is exciting, but it comes with tough choices, especially about sharing ownership through equity. This post breaks down the basics of equity and offers easy-to-follow advice for founders, managers, and investors.

What is Early-Stage Equity?

When a company is just getting started, it doesn't have much money. That's why giving away shares ownership in exchange for help, known as equity, seems like a good idea. But remember, equity means giving up part of your business.

The Problem with Early Equity

As time goes on, people who own part of your business may want to leave. They own shares in your company, but it's hard to agree on what those shares are worth. This can lead to difficult conversations and even the end of your business.

Some people think giving out equity makes everyone work harder. While that can be true, it's important to know the risks and keep things simple.

How to Handle Equity

Here are some simple ways to manage the risks of giving away equity too easily:

1. Use Vesting Schedules

Vesting means earning equity over time. This helps make sure everyone stays committed to the business. Just remember, you might need to adjust these schedules as your business grows.

Some say vesting can give a false sense of security to the founders giving the shares. It's good to check and change any standard vesting plan to align with the incentives you want to create.

2. Pay for Work, Don't Give Out Shares

Instead of giving out equity, pay people for the work they do. This could be based on reaching certain goals or milestones. It keeps things clear and avoids emotional disagreements later on.

3. Keep Control of Key Skills

Focus on what your business really needs. If you can do something yourself, don't give that part away. Only share ownership in the company in exchange for things you can't do alone.

4. Think About Getting Investors

If you have a strong team and a clear plan, consider getting investors. They can bring in money and set goals for everyone to work towards, which creates a culture of work-based rewards.

Conclusion

Equity can be a powerful tool, but it also comes with risks. By keeping things simple and using these easy steps, you can manage equity wisely. Remember, it's about sharing ownership while keeping everyone aligned and committed to your business's success.