In a typical startup equity structure, founders are issued shares of common stock of a newly formed corporation. Common stock is the same type of stock that companies typically issue to employees and other service providers.
Do founders own equity?
Yes, they do. Various factors, including the startup’s stage, the amount of received funding, and the founder’s roles and responsibilities, might affect the amount of stock founders get. In the startup’s formative years, founders typically receive a larger percentage of equity for taking on more risk and putting in more effort to get the company off the ground.
What is founder’s equity?
A startup founder’s ownership percentage is known as "founder’s equity.” This ownership stake gives a founder a say in how to run the startup and make decisions. It also entitles them to the startup’s profit shares in the form of dividends or distributions.
How to issue shares to founders?
Founders typically pay for these shares with a nominal amount of cash, a contribution of intellectual property, or both. For Delaware corporations, it is advisable to pay cash for at least the par value of the shares being purchased. Founders usually maintain stockholder voting control over the company based on their large equity ownership in relation to other holders. Founders should subject their own shares to vesting. They also may include vesting acceleration provisions for their shares.
Do founders get preferred stock?
Founders may receive preferred stock as part of their initial investment or as compensation for establishing and maintaining the company. The founders' preferred stock terms may vary depending on the agreement between the founders and the investors. However, preferred stockholders have priority over common stockholders.
What if you opt for a different type of equity?
In other types of equity agreements, founders may opt to implement more complicated types of stock for themselves, such as supervoting stock or Series FF or founders preferred stock. Certain founders may find these types of equity to make sense for their circumstances and experience when forming the founder equity agreement; however, more complicated structures may entail higher costs upfront to implement and over time to maintain.
Essentially, issuing equity shares to a founder is a critical step in forming a startup as it defines the ownership structure and gives founders incentives to grow the company.
LTSE Equity is a fully-featured cap table management tool that helps startups manage and plan equity.
Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.