March 11, 2025 • 28 mins
In this episode of Startup Leap, hosts Yvonne and Maria dive deep into critical considerations for startup founders focusing on equity allocation and cap table management.
The episode covers insights on how to strategically allocate early equity with co-founders, advisors, and employees, including tips on vesting schedules and cliffs.
They share expert advice on raising the right amount of capital at the appropriate time and negotiating beyond just valuation. Featuring the real-life dilemma of a founder dealing with an unequal equity split, the hosts offer practical solutions and emphasize the importance of having clear agreements and structured equity plans.
Listen to understand different strategies used by successful founders, backed by examples from industry giants like Mark Zuckerberg.
00:00 Introduction to Equity Allocation
00:12 Understanding Company Valuation
00:24 Founder Dilemmas and Real-Life Examples
00:32 Critical Tips for Equity Allocation
01:45 Strategic Early Equity Decisions
04:55 Vesting Schedules and Cliffs Explained
06:54 Employee Share Option Pools (ESOP)
07:57 Listener's Co-Founder Dilemma
12:29 Raising the Right Amount at the Right Time
19:17 Negotiating Terms Beyond Valuation
25:19 Bonus Tip: Smart Equity Structuring
27:59 Conclusion and Final Thoughts
🎧 Don’t miss this important conversation for any founder at the start of their startup equity journey.
👉 Like, comment, and subscribe for more expert startup advice!
📩 Have questions? Drop them in the comments – we’d love to keep the conversation going! Want to suggest a topic for us to cover, tell us in the comments!
Have a founder dilemma you want us to answer on the show, tell us here-> https://bit.ly/tslquestions
đź”— Join The Startup Leap Community: https://subscribe.thestartupleap.io
Youtube: https://youtu.be/QyrjUhJofpk
đź’ˇResources mentioned on the episode:
Carta Article on CapTables:
https://carta.com/uk/en/learn/startups/equity-management/cap-table/#common-formats
Venture Deals Book:
#StartupFunding #EquityAllocation #CapTableManagement #VestingSchedules #StartupSuccess #FundraisingTips #ESOP #FounderEquity #NegotiationSkills #StartupGrowth
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
In the very early days of verging, Branson actually gave away too much equity.
(00:04):
Mark Zuckerberg of Facebook, his approach with the co-founders at the time initially
had 50% and Eduardo had 30%.
Now let's talk about the company valuation.
So many founders I think focus on really getting that highest valuation possible.
Beyond valuation, there are things that impact your equity.
It's things like share class.
Next, we're actually going to listen to our very first founder dilemma on a co-founder
(00:27):
situation and we'll share our thoughts so stick around.
Today we're diving into a real critical topic for every startup founder.
How to think about equity allocation and master your cap table.
This is probably one of the most critical aspects when you're starting out your business
and one that was actually requested by our listeners.
So if you're in the early stages of building your company, thinking about equity allocation,
(00:50):
this is the perfect episode for you.
I'm Yvonne.
And I'm Maria.
And why are we speaking about this?
So Yvonne and I have invested in over a hundred startups.
So we've seen co-founders, splits and flavors in many different ways.
And we thought to bring those experiences to life here today for you.
Now, equity allocation in the early stage is not just about your spreadsheet.
(01:11):
Yes, it's numbers and it all needs to add up, but it's also what will decide the foundation
of ownership and control of your company in the long run.
Today, we're going to break down three mistakes tips that you should keep in mind as you think
about setting up your cap table.
And we're going to also have a bonus tip at the end.
So stick around.
(01:32):
And in our usual fashion, we're going to bring stories like, for example, Mark Zuckerberg,
how he's done that with Meta.
Amazing.
Let's get straight into it.
So the first tip that I would say is be really strategic about the early equity with co-founders
and advisors.
Many founders actually give away way too much equity too soon, especially when bringing
(01:53):
in co-founders, advisors and early employees.
Just to share some examples, in the very early days of Verging, Branson actually gave away
too much equity to keep the business afloat when he was raising capital for it.
And what he had to do is buy back shares later on down the line in order to maintain that
premium and regain control.
You do not want to be in that scenario.
(02:13):
So you want to ensure that in the very early stages, you're thinking about how you're
giving away that equity.
Because there's many, many examples that we will share throughout this episode where too
much has been given out too early or not enough thought has been given in those very early
stages.
And I think that co-founders are one that when you start, that's the first folks you're
going to give equity to, your co-founder.
(02:34):
You either are starting it all together or you're starting and then bringing your co-founder
on board.
So this one is very tricky because there's no one size fits all, right?
Some founders lean towards, oh, you know, off the bat, it should be equal risk, equal
responsibility, equal splits.
If we're all starting on it full time and we're all starting at the beginning, everyone
should take equal splits.
(02:55):
If it's two founders, 50-50, if it's three, 30-30, 33.
Now there's another camp of people who believe that, look, it depends on who's actually
driving the business.
Who is the person that without that person, that business cannot succeed or it would be
completely different.
Who is the person who's taking more risk, who's senior, more junior, they should hold
the majority of the shares.
(03:15):
What we've found in our experience is that there's really no one size fits all.
Different founders do it many different ways.
But if you look at the story of Mark Zuckerberg of Facebook, his approach with the co-founders
at the time, and we all know the story that they eventually fought and split and everything.
But Zuck initially had 50% and Eduardo had 30% and they left the rest for like equity,
(03:36):
stock options for employees.
But then he later actually recapitalized.
He reduced from 50 to 40, but then Eduardo 30 to 24 and then left more room for a third
co-founder.
And so I think this is just to say that you could do it very many different ways.
In fact, Carter, you might know of it, says only 41% of two founder teams actually split
(03:59):
equally.
So some people choose to split equally and others don't.
Yes, the Carter insights on this is actually really incredible.
We will include it in the show notes.
But on equal splits with two founding teams, one of the things to be really careful about
is deadlocks.
Oftentimes, investors want you to be able to break a tie, which means that a 50-50 split
doesn't always work.
Sometimes you see founders doing like a 51 to 49% split.
(04:23):
But ultimately, we do see a common split of 50-50 to ensure alignment.
It really does boil down to trust.
Also, many founders really actually swear by 50-50 because they believe it gives equal
responsibility, commitment and incentive.
But ultimately, there's no real one size fits all.
So you have to really think through what truly works for you.
On Zuckerberg, when he was building Facebook, he actually structured his equity and voting
(04:45):
shares in a way that allowed him to retain control, even as he raised billions and billions
of dollars of funding.
So key takeaway here is use vesting schedules and cliff to ensure that equity is earned
over time and that you're not giving away too much upfront.
Absolutely.
And what are vesting schedules and cliffs?
It might be something you know of or maybe not that much, but it's pretty much getting
(05:08):
ownership over time.
So on day one, you don't issue the 100% of the shares.
Say you had two co-founders and they did split 50-50 and split.
On day one, if you are vesting over five years, you get 10% of the company every year for
five years for one co-founder and the same thing for every co-founder.
So if the co-founder maybe left one year, they would only get 10% as opposed to the
(05:30):
50% on the first year.
So that kind of just aligns incentives and makes sure that in the long term, people actually
work, stay for long enough to be able to earn the equity that they have.
Now, cliffs on the other hand, are essentially a step in the vesting schedule.
And the example that I gave, say a founder has 50% and they did a five-year vesting schedule,
(05:52):
meaning that they earned their 50% over five years.
So you get 10% every year.
A cliff is when they have to think of the way a cliff is, you have to go over that cliff
before you earn it.
So if the cliff was say one year, they would actually not earn any shares up until the
first year.
So if they left a day before the first year anniversary, they would earn zero, even though
they'd been working on it for a year.
(06:12):
But if they waited till the year, they would earn that 10% and so on and so forth.
And in terms of the vesting schedule, it could actually be annually, it could be quarterly,
it could be monthly.
So you could be earning it monthly over time.
But that's just an example of how to think about vesting schedule and cliffs.
And it's a very strong mechanism to protect and align incentives for everyone involved.
(06:32):
Yeah.
And as a founder that Maria and I have both backed actually, that has a vesting schedule
as long as six years.
Typically, we see these range anywhere from four years, but nowadays we're seeing companies
stretch them even further, just given how long it takes to truly build a category to
find in business.
That's something that you might want to consider.
Now on employees and advisors, it's really important that you keep an employee share
(06:56):
option pool.
You want to have a way to incentivize new employees as the company grows and scales
and actually exist employees too.
And so what is the employee share option pool or ESOP as it's also known as?
This is typically a proportion of the company that you grant or hold as options for employees.
And it's a really powerful tool to attract, attain and motivate employees, especially
(07:18):
when startups are honestly not able to offer the same salaries that a normal company would.
The same could be applied to advisors as well.
So you could provide your advisors with equity, have a think about that, always try to maintain
an ESOP.
Typically, we see this ranging from anywhere from 10%.
I've seen ESOPs go right up to 20% as well.
(07:39):
You want to find a way to incentivize those employees that come on, particularly those
that come in the early days.
Next, we're actually going to listen to our very first founder dilemma on a co-founder
situation and we'll share our thoughts.
So stick around.
So welcome back.
Now let's take this dilemma very first from one of our listeners.
So it says, hi, Startup Leap team.
Thanks for the amazing content.
(08:00):
My favorite episode is the episode with Nadia Odeniah of Storygraph.
I found it incredible.
Now onto my dilemma.
I'm the founder of a consumer brand startup in the UK, which I co-founded with a partner.
We initially split equity equally without a contract or agreement.
And for the first few years, things were going well.
However, a year in, the dynamic has shifted significantly.
(08:22):
I've been putting in far more work while my co-founder is increasingly occupied with
other commitments.
At this point, it feels like I'm running the business alone.
And I believe our equity split no longer reflects the reality of our contributions.
I've already addressed this with my co-founder, asking whether he would dedicate more time.
He said he can't or consider reducing his equity share.
He refused.
(08:43):
We're now at a deadlock.
I have committed significantly more time and money.
I'm feeling increasingly resentful.
I'm now considering legal action, but I'd love to know how should I approach this situation?
And in hindsight, how could I have structured things differently to avoid this issue?
Would appreciate your advice.
What do you think you want?
Well, that's a tough one.
I think since their co-founder isn't really willing to adjust the equity or increase their
(09:06):
commitment, I think there's a few options.
First of all, reframing the conversation around the fact that do they want to potentially
ask for the equity back and discuss what's a fair contribution?
He tried that.
The co-founder said no.
He's willing to step down to an advisory role where he's still contributing, but not fully
invested and then seeing what equity is actually correlating to how much they're putting in.
(09:30):
And if that doesn't work, I guess checking their legal position, things can get really
sticky if you don't have a founder's agreement in place.
But the key is just to focus on how to move forward.
And I think at the end of the day, you'd rather have a piece of a bigger pie than a piece
of no pie.
And so I think the co-founder just really needs to understand implications that this
could have on the business if they don't come to an agreement.
(09:50):
First, one thing that I honestly believe, especially with co-founder situations, is
that it all boils down to trust.
Once you cannot communicate, that's the beginning of the end.
And I've seen so many founders where they start off pretty good, but once that communication
breaks down, it goes off.
Honestly, it doesn't need to get to this.
This is an extreme case.
And it also just shows maybe the breakdown in trust in the fact that they've already
(10:12):
lost trust in the fact that they've not been communicating.
And it seems like it's one-sided.
So one person is trying to communicate and the other person isn't communicating.
But what I would say as well is for anyone listening that may want to avoid this type
of scenario, instead of giving 50-50 upfront, founders should always have that period that
Maria touched on earlier.
And this is a way that you can ensure that if someone does walk away early, they're not
(10:35):
leaving with a huge chunk of equity, which could obviously impact your fundraising in
the future.
And I think, as I mentioned, have a founders agreement where you have defined roles and
commitment levels outlined from the very early stages.
Who does what?
What happens if the founder doesn't contribute?
Exit clauses to really put in place some sort of ideas around what to do in these situations
(10:56):
and a plan for the equity dynamics as well.
So one of the feedback that we've in our previous episodes is try before you buy,
essentially, like work together and build those muscles of communication because they
don't necessarily come naturally.
As human beings, we're likely to not want to have difficult conversations.
So building those muscles together before actually getting to a situation where it then
(11:16):
gets extreme like this.
The other thing, and I think Yvonne has touched on it, is the contract and the agreement
is very important off the bat.
Just to give a sense of what's happening, I already touched about the vesting clause.
If that was the case here, maybe the founder could have gone away with much less equity
and the business can still continue.
But if their co-founders and this play for equal in and now they're in a deadlock situation
(11:38):
one person is not speaking, the business cannot go forward.
I would say that in retrospect, a contract, but beyond a contract, a vesting clause, a
buyback clause, how do we get, if anything happens, if priorities change, things happen,
how do we get it back?
But I want you to know that despite all of this, if there's a breakdown in the relationship,
I've seen it, it doesn't matter.
(12:00):
Things just get really messy and things get really bad, which is why who you choose as
a co-founder at the background is really critical.
I would say keep trying to have that conversation, but if it comes down to it that you can't,
you might have to exit the business and move on.
I think the founders agreement vesting schedules would have probably alleviated
some of these problems.
(12:21):
Now let's jump back into our tips.
Welcome back.
So on the second tip is raising the right amount at the right time.
It's tempting to take the largest check on offer, especially if you get that opportunity.
You just started, someone is offering you an incredible amount of money as the valuation
for your company and you're like, yes, that's not what your company is valued at because
(12:43):
you don't have revenue yet, most likely valuation is very nuanced in early stage.
So it's still very much changing, but in that early stage, some founders might raise too
little.
And we often see this actually with founders who are like, Oh, I don't want to give too
much of my company too quickly.
That's that general sense is okay, but you can raise too little at a too low valuation.
(13:06):
And then some people...
It's really a balancing act.
It's very hard because you can't say raise this amount because it really depends.
And you know what?
It actually also depends on the business model.
Don't you think there are some business models that don't actually need you to raise
that much money.
And there are some that counter-intuitively need you to.
So for example, I was speaking to a founder recently and she was talking about a space
(13:26):
tech startup that's building space tech.
Both software and hardware.
You can't give the same advice for SaaS companies, for a space tech company that needs
infrastructure.
And beyond even the infrastructure, they probably need to be very well capitalized before
they can get on some of the clients that they need.
Or maybe like a financial regulated startup that needs some heavy capital requirements.
(13:47):
So I guess the gist here is really figure out how much your business needs and try not
to raise too little or too much.
But I would say to just end my thoughts on this one is it's really not about the valuation.
It's about the dilution.
From a venture SaaS standpoint, we tend to see between 15 to 20% or 10 to 20% dilution.
Some founders go as low as five and some go as high as 30, but those would be extreme
(14:10):
cases in my opinion.
Yeah, 30 is definitely.
And I think just coming back to that point around how you should think about what you
need, how much the valuation should be.
Key thing in my opinion is just really around what milestones can you achieve with the money
you raise to help you get to that next round.
Because really when you do raise the round, that should just help you get to that next
(14:33):
phase.
Just another key point that I wanted to draw out.
Now let's talk about the company valuation.
So many founders, I think, focus on really getting that highest valuation possible.
But actually the high valuation can cause issues later on down the line.
So 2020, 2021, we saw a number of companies raise at significantly high valuations.
But when they came to raise their next round, if they hadn't had the growth to really grow
(14:56):
into that valuation, then it caused a number of issues.
So let's put it into perspective.
Let's say you're a pre-seed company, you raise that valuation of say 50 million.
You then go on to raise your next round.
However, revenue is only 100K.
How do you justify that next round valuation?
And so that's another thing that you should really think about.
So I've had a number of companies approach me, haven't raised rounds at significantly
(15:19):
high valuations.
They go to raise their next round and it's really hard to grapple with trying to either
come in at a higher valuation or what you don't want is a down round.
But some companies have to do that.
Facebook had a down round, right?
It's not the world, but you want to avoid that because it means that you result in extra
dilution when you don't really need to, if you had just had a reasonable valuation at
(15:41):
every given stage.
Yeah.
And it's so interesting because there's the high valuation part, but there's also the low
valuation part.
There are founders that I know that have raised on incredibly low valuations where it's, this
is not a venture investable company anymore because someone owns like 60% of the company
and it's not even the founder.
(16:01):
I'm like,
I was like, a founder had said that they gave away like 50% and this was like a seed state.
They were raising a seed round and I was just like,
no investor is going to come into that.
Yeah.
And it's not just because they don't have enough room to actually participate in the
company.
It's also if you, the founder have 10% of the company, I'm sorry, you're not incentivized.
There's nothing you can tell me.
(16:22):
Like you're not going to work as hard on the business as if you had a more significant
percentage.
And this changes obviously over time as the business grows, there are companies right
now that IPO, the founders own single digits.
It's normal later, but the earliest stages you want to have enough.
Now on the low valuations where I tend to see this happen is sometimes with accelerators.
(16:45):
And this is a double edged sword because there's some really good accelerators or programs
that it's worth the ownership because of the value that they create and they unlock very
quickly for you to have a higher value and kind of de-risk you, but not accelerators are
made equal and you should do your research.
Another thing that I see, especially with first time founders is maybe you just started
and maybe there's an angel who says, oh, this is exciting.
(17:07):
I want to invest, but they're like, I will take 40%.
You're like, you don't really know yet.
I own 60% still, so that's fine.
No, you really need to think about this in the context of your business model.
What's typical, the funding you would need to get to the outcomes that the angels and
the investors are expecting of you later down the line.
And I know that some of our listeners and our audience don't necessarily, you're not
necessarily building just tech startups.
(17:29):
So this is very much the VC tech type startup.
If you are building a tech startup, this example makes sense, just to give you a sense.
Every VC expects that you will raise money, you will continue to raise.
We talked about this in one of our previous episodes where we're like, if you're going
on the VC track, you're probably going to need to raise.
And you might start at, let's just give an example, 500K at a 5 million post-money valuation.
(17:51):
Now post-money is just after we invest, that's the valuation of the company.
It adds the money we invested into the valuation.
And then you raise other rounds, 1 million at a 10, 10 million at 100 million, 500, 300
at a billion.
Now you're a unicorn.
After all of this, if you are a two founding team and you started with 85 or 90% at the
beginning of your company, let's say you kept 10% aside for employee stock options.
(18:16):
You now have about 17% of the company individually after all of this dilution because of the
money you've collected.
Now this is assuming that the investors don't even ask you to increase your equity allocation
pool or something else dilute the shares.
There's a lot of assumptions in that and I would even say that's a conservative estimate.
(18:36):
So just to let you know that as you raise money, you are getting more diluted and tracking
In fact, one of the founders that I spoke to recently said he's a lawyer and he's a
founder and he's been a founder for six years now.
He's even, I was shocked by how diluted I was over time.
The founders don't think about it and you really need to do the math.
(18:57):
You really need to bring out that Excel sheet and say, if we raise at that, then we're
at this valuation.
How much does that dilute us and scope so forth and so on?
Absolutely.
Tip number three, negotiate terms beyond valuation.
Many founders focus solely on the high valuation as we touched on before, but seemingly
investor friendly terms can lead to unintended consequences.
(19:22):
Yeah, beyond valuation, there are things that impact your equity.
So it's also rights.
It's things like share class.
It's things like your information rights.
It's things like where investors have say or not.
So I would say like the entire gist here is beyond the value of the company.
There are many other things that you can actually use as levers that ultimately impact
(19:45):
the equity.
So just really thinking about that when you think about your negotiation on the cap table.
Yeah.
And I think there's many great lessons in history as always.
So if you look at SNAP's Ivan Spiegel, he structured his fundraising rounds with dual
class shares, for example, and really ensured that he retained voting control as new investors
came in.
Now, this won't work for every investor, but this is why it's really important to think
(20:07):
about everything from like liquidation preferences, voting rights, board control.
It's just as important as the valuation and the money that you have coming in.
Yeah.
And I would say that if you think about the different levers, so for example, dual class
shares, actually Mark Zuckerberg used this very well to retain ownership and control.
I would even say like more control than ownership.
(20:31):
And if you think of dual class shares, so just like very quickly, shares, you're essentially
selling pieces of your business, but you can literally create classes of shares that have
things that they can do and they can have super voting.
They can have rights and you offer the shares to investors that have maybe lower rights.
And then you keep shares to the founders or certain investors that have higher rights.
(20:55):
Now, a huge caveat, we're not all Mark Zuckerberg.
There's a dynamic in terms of leverage experience that you might be able to use as leverage in
this conversation.
Many times you can't quite pull these things, but they're good to know because at the end
of the day, as a founder, you're still in the driver's seat, right?
You can decide whether or not you accept a check or you don't and what terms ultimately.
(21:18):
Now, dual class shares allow for that.
It's just essentially creating separate class shares that allow for you to do more things
on one than the other.
Mark Zuckerberg, like I was saying, actually did this where his shares, the founder's shares
actually have super voting rights.
So say for example, Class A and Class B, they have a hundred million shares and on the Class
A shares, it's not one for one vote.
(21:40):
It's actually each vote counts as 10 votes, but for Class B shares, it's one for one.
If somebody did a vote based on the number of shares, it will count as one.
So just imagine how that skews the conversation where on one class, it's 10 votes to one share
and another class is one to one.
Then the other one is liquidation preferences.
This one is very important because people don't really think about it.
Now, I'm not a lawyer, but when you think about share classes, they're actually usually
(22:03):
in two classes.
There's usually a common class share and there's a preferred share.
The common class share is often what is traded publicly, but for private companies, sometimes
there's a preference share and that preference share is what investors tend to want.
And the reason why it's a preference share, if you hear the name preference preferred,
is that in the hierarchy of when maybe the company gets an exit or is bought or sold,
(22:25):
that preference share is actually higher than a common share.
Most founders, their share class is actually common share.
So there's almost like a hierarchy.
It's usually debt, preference shares, and then common shares.
So after you've paid your debtors, the preference shareholders who are often the investors,
so think about an exit.
Your investors will collect their money first.
Now, this is where liquidation preference is coming.
(22:47):
If I invested $10,000 and I have a 1X preference share, I'm saying that when you're paying
in terms of the arrangement, pay me the preference share holder, pay 1X my original amount.
So 10,000, I get my 10,000 back and then I get whatever I need to get from common shares,
because oftentimes there's common shares equivalent as well attached to the preference shares.
But if it's a 2X, even though I invested 10, when the exit conversation is happening, you
(23:12):
will pay me two times my original 10,000.
So that's 20,000.
Now, imagine if I invested 10 million, 30 million, 100 million.
It means you need to pay me that X factor, 2X, 3X of what I originally put in.
This can be dangerous.
As a founder, you might not get any money at the end of the day, because everybody has
all these preference shares.
(23:32):
You could get the highest valuation, but if the liquidation preferences are not in your
favor, that might not actually work out well for you in the long run.
Yeah, no, absolutely.
And along with liquidation preferences, coming back to voting rights, as Maria
touched on earlier, if investors get voting rights, I think it's really key to try and
ensure that they are proportional to their ownership and do not exceed standard investor
(23:54):
privileges.
One book that I really recommend when it comes to all things technical, legal, when it comes
to the way in which venture deals are actually structured is Venture Deals by Brad and Jason,
a highly recommended book.
Personally, I don't think any founder should raise money without reading this book.
Yeah, the basic knowledge is around all things to do with term sheets and the documentation.
(24:16):
Now, the other thing that I want to highlight is limited protective provisions.
Now, oftentimes in investment docs or when you receive your term sheet, you will see
that there are certain rights and things that require investor approval.
Now, this is pretty standard and it can include everything from hiring executives to how much
you spend on particular areas of the business to even selling the company.
(24:38):
However, one thing I do want to highlight is where there may be overly restrictive terms,
that's something that you just want to push back on.
And so it's really important that you have a good view on what some of those overly
restrictive terms are so you can push back on that.
So again, it's not just about the money, it's not just about the valuation.
You really need to understand some of these legal technicalities as well because it could
(24:58):
have a substantial impact on the way in which you run your business and how you actually
navigate your journey as a founder.
Now, we have a bonus tip for you.
So hang on.
Fantastic.
Now, welcome.
Our bonus tip is smart equity structuring.
Another thing to think about is not just how much you give away, but how you allocate it.
(25:19):
One thing to note is that to keep your cap table clean and your cap table is essentially
your list of shareholders, you want to syndicate small checks into an SBB.
So when you start off, oftentimes you're starting off from checks from friends and family,
maybe a couple of thousand here and there.
It's very difficult administratively to have all of them in your shareholders agreement
(25:39):
doing that.
Now we have things like safes.
We have some legal agreements that make it easy to do, but still you probably want to
coordinate people into one entity and have them sign agreements as a whole entity because
they are smaller checks.
This will save you a headache later down the line when you're trying to get everyone to
agree to things.
There are platforms that actually help you do this very simply.
(26:01):
There's AngelList.
There's Odin here in the UK.
There are a few other platforms.
Check them out.
This is not a sponsored statement by the way.
It's just, these are things that you can leverage.
So yeah, really think about structuring and the admin of your equity as well.
Yeah.
And be really smart around how you structure your equity as well.
If you have an employee share option pool, you actually don't have to just allocate that
(26:25):
to new employees.
You can actually continue to distribute that to existing employees as a way to incentivize
them.
And actually one of the founders that we spoke to as we were thinking about this episode
share the fact that in one of his companies, he actually thought about distributing some
of those option shares to his existing founding team to incentivize them over the year.
(26:47):
So every year they would distribute some of that as a great way to incentivize them and
increase their equity ownership over time.
And so you can actually get really creative with how you think about incentivization.
This is not like one playbook for all companies, really think about what works for you and
you can get creative as well.
When you think about share options, a bit of a technical point, but share options are
(27:09):
not technically shares off the bat.
So it's just a pool for shares you allocate.
So options actually mean something completely different.
You have to buy the option, almost like a right to buy.
So when you issue it, they actually have to buy it, but it's often at a discount to its
future price.
So it can be very lucrative.
So there's still that nuance there.
But especially in VC, Yvonne, I'm sure like 100% of the founders you've invested in, at
(27:35):
least for me, it's 100%, maybe even close.
It's like they all have a share employee, like an ESOP, like an option pool, because
at the beginning you can't compete on salaries.
You don't have it.
So there you have it, three key ways to preserve equity and one powerful bonus tip we have
for you as well.
Be strategic with early equity allocation with co-founders and advisors.
(27:57):
Raise the amount at the right time that you need.
Negotiate terms beyond the valuation.
And don't forget the power of smart equity structuring.
Absolutely.
And yeah, managing your cap table wisely can be the difference between success or failure.
If you found this episode helpful, make sure to subscribe, leave a comment, tell us what
you think.
And remember, this episode was actually as a result of someone commenting and saying
(28:20):
that we should touch on this.
So if there are any topics you want us to really deep dive into, we'd be more than happy
to do that.
So thanks for tuning in and we'll see you next time.
See you next time.
Leave a review.
Tell us what you think of this episode on all our platforms at the Startup Leap port.
Do you have a question?
Ask us and we'll ask our guests.
Go to the startupleap.io.
(28:41):
See you next time.
In the very early days of verging, Branson actually gave away too much equity.
(00:04):
Mark Zuckerberg of Facebook, his approach with the co-founders at the time initially
had 50% and Eduardo had 30%.
Now let's talk about the company valuation.
So many founders I think focus on really getting that highest valuation possible.
Beyond valuation, there are things that impact your equity.
It's things like share class.
Next, we're actually going to listen to our very first founder dilemma on a co-founder
(00:27):
situation and we'll share our thoughts so stick around.
Today we're diving into a real critical topic for every startup founder.
How to think about equity allocation and master your cap table.
This is probably one of the most critical aspects when you're starting out your business
and one that was actually requested by our listeners.
So if you're in the early stages of building your company, thinking about equity allocation,
(00:50):
this is the perfect episode for you.
I'm Yvonne.
And I'm Maria.
And why are we speaking about this?
So Yvonne and I have invested in over a hundred startups.
So we've seen co-founders, splits and flavors in many different ways.
And we thought to bring those experiences to life here today for you.
Now, equity allocation in the early stage is not just about your spreadsheet.
(01:11):
Yes, it's numbers and it all needs to add up, but it's also what will decide the foundation
of ownership and control of your company in the long run.
Today, we're going to break down three mistakes tips that you should keep in mind as you think
about setting up your cap table.
And we're going to also have a bonus tip at the end.
So stick around.
(01:32):
And in our usual fashion, we're going to bring stories like, for example, Mark Zuckerberg,
how he's done that with Meta.
Amazing.
Let's get straight into it.
So the first tip that I would say is be really strategic about the early equity with co-founders
and advisors.
Many founders actually give away way too much equity too soon, especially when bringing
(01:53):
in co-founders, advisors and early employees.
Just to share some examples, in the very early days of Verging, Branson actually gave away
too much equity to keep the business afloat when he was raising capital for it.
And what he had to do is buy back shares later on down the line in order to maintain that
premium and regain control.
You do not want to be in that scenario.
(02:13):
So you want to ensure that in the very early stages, you're thinking about how you're
giving away that equity.
Because there's many, many examples that we will share throughout this episode where too
much has been given out too early or not enough thought has been given in those very early
stages.
And I think that co-founders are one that when you start, that's the first folks you're
going to give equity to, your co-founder.
(02:34):
You either are starting it all together or you're starting and then bringing your co-founder
on board.
So this one is very tricky because there's no one size fits all, right?
Some founders lean towards, oh, you know, off the bat, it should be equal risk, equal
responsibility, equal splits.
If we're all starting on it full time and we're all starting at the beginning, everyone
should take equal splits.
(02:55):
If it's two founders, 50-50, if it's three, 30-30, 33.
Now there's another camp of people who believe that, look, it depends on who's actually
driving the business.
Who is the person that without that person, that business cannot succeed or it would be
completely different.
Who is the person who's taking more risk, who's senior, more junior, they should hold
the majority of the shares.
(03:15):
What we've found in our experience is that there's really no one size fits all.
Different founders do it many different ways.
But if you look at the story of Mark Zuckerberg of Facebook, his approach with the co-founders
at the time, and we all know the story that they eventually fought and split and everything.
But Zuck initially had 50% and Eduardo had 30% and they left the rest for like equity,
(03:36):
stock options for employees.
But then he later actually recapitalized.
He reduced from 50 to 40, but then Eduardo 30 to 24 and then left more room for a third
co-founder.
And so I think this is just to say that you could do it very many different ways.
In fact, Carter, you might know of it, says only 41% of two founder teams actually split
(03:59):
equally.
So some people choose to split equally and others don't.
Yes, the Carter insights on this is actually really incredible.
We will include it in the show notes.
But on equal splits with two founding teams, one of the things to be really careful about
is deadlocks.
Oftentimes, investors want you to be able to break a tie, which means that a 50-50 split
doesn't always work.
Sometimes you see founders doing like a 51 to 49% split.
(04:23):
But ultimately, we do see a common split of 50-50 to ensure alignment.
It really does boil down to trust.
Also, many founders really actually swear by 50-50 because they believe it gives equal
responsibility, commitment and incentive.
But ultimately, there's no real one size fits all.
So you have to really think through what truly works for you.
On Zuckerberg, when he was building Facebook, he actually structured his equity and voting
(04:45):
shares in a way that allowed him to retain control, even as he raised billions and billions
of dollars of funding.
So key takeaway here is use vesting schedules and cliff to ensure that equity is earned
over time and that you're not giving away too much upfront.
Absolutely.
And what are vesting schedules and cliffs?
It might be something you know of or maybe not that much, but it's pretty much getting
(05:08):
ownership over time.
So on day one, you don't issue the 100% of the shares.
Say you had two co-founders and they did split 50-50 and split.
On day one, if you are vesting over five years, you get 10% of the company every year for
five years for one co-founder and the same thing for every co-founder.
So if the co-founder maybe left one year, they would only get 10% as opposed to the
(05:30):
50% on the first year.
So that kind of just aligns incentives and makes sure that in the long term, people actually
work, stay for long enough to be able to earn the equity that they have.
Now, cliffs on the other hand, are essentially a step in the vesting schedule.
And the example that I gave, say a founder has 50% and they did a five-year vesting schedule,
(05:52):
meaning that they earned their 50% over five years.
So you get 10% every year.
A cliff is when they have to think of the way a cliff is, you have to go over that cliff
before you earn it.
So if the cliff was say one year, they would actually not earn any shares up until the
first year.
So if they left a day before the first year anniversary, they would earn zero, even though
they'd been working on it for a year.
(06:12):
But if they waited till the year, they would earn that 10% and so on and so forth.
And in terms of the vesting schedule, it could actually be annually, it could be quarterly,
it could be monthly.
So you could be earning it monthly over time.
But that's just an example of how to think about vesting schedule and cliffs.
And it's a very strong mechanism to protect and align incentives for everyone involved.
(06:32):
Yeah.
And as a founder that Maria and I have both backed actually, that has a vesting schedule
as long as six years.
Typically, we see these range anywhere from four years, but nowadays we're seeing companies
stretch them even further, just given how long it takes to truly build a category to
find in business.
That's something that you might want to consider.
Now on employees and advisors, it's really important that you keep an employee share
(06:56):
option pool.
You want to have a way to incentivize new employees as the company grows and scales
and actually exist employees too.
And so what is the employee share option pool or ESOP as it's also known as?
This is typically a proportion of the company that you grant or hold as options for employees.
And it's a really powerful tool to attract, attain and motivate employees, especially
(07:18):
when startups are honestly not able to offer the same salaries that a normal company would.
The same could be applied to advisors as well.
So you could provide your advisors with equity, have a think about that, always try to maintain
an ESOP.
Typically, we see this ranging from anywhere from 10%.
I've seen ESOPs go right up to 20% as well.
(07:39):
You want to find a way to incentivize those employees that come on, particularly those
that come in the early days.
Next, we're actually going to listen to our very first founder dilemma on a co-founder
situation and we'll share our thoughts.
So stick around.
So welcome back.
Now let's take this dilemma very first from one of our listeners.
So it says, hi, Startup Leap team.
Thanks for the amazing content.
(08:00):
My favorite episode is the episode with Nadia Odeniah of Storygraph.
I found it incredible.
Now onto my dilemma.
I'm the founder of a consumer brand startup in the UK, which I co-founded with a partner.
We initially split equity equally without a contract or agreement.
And for the first few years, things were going well.
However, a year in, the dynamic has shifted significantly.
(08:22):
I've been putting in far more work while my co-founder is increasingly occupied with
other commitments.
At this point, it feels like I'm running the business alone.
And I believe our equity split no longer reflects the reality of our contributions.
I've already addressed this with my co-founder, asking whether he would dedicate more time.
He said he can't or consider reducing his equity share.
He refused.
(08:43):
We're now at a deadlock.
I have committed significantly more time and money.
I'm feeling increasingly resentful.
I'm now considering legal action, but I'd love to know how should I approach this situation?
And in hindsight, how could I have structured things differently to avoid this issue?
Would appreciate your advice.
What do you think you want?
Well, that's a tough one.
I think since their co-founder isn't really willing to adjust the equity or increase their
(09:06):
commitment, I think there's a few options.
First of all, reframing the conversation around the fact that do they want to potentially
ask for the equity back and discuss what's a fair contribution?
He tried that.
The co-founder said no.
He's willing to step down to an advisory role where he's still contributing, but not fully
invested and then seeing what equity is actually correlating to how much they're putting in.
(09:30):
And if that doesn't work, I guess checking their legal position, things can get really
sticky if you don't have a founder's agreement in place.
But the key is just to focus on how to move forward.
And I think at the end of the day, you'd rather have a piece of a bigger pie than a piece
of no pie.
And so I think the co-founder just really needs to understand implications that this
could have on the business if they don't come to an agreement.
(09:50):
First, one thing that I honestly believe, especially with co-founder situations, is
that it all boils down to trust.
Once you cannot communicate, that's the beginning of the end.
And I've seen so many founders where they start off pretty good, but once that communication
breaks down, it goes off.
Honestly, it doesn't need to get to this.
This is an extreme case.
And it also just shows maybe the breakdown in trust in the fact that they've already
(10:12):
lost trust in the fact that they've not been communicating.
And it seems like it's one-sided.
So one person is trying to communicate and the other person isn't communicating.
But what I would say as well is for anyone listening that may want to avoid this type
of scenario, instead of giving 50-50 upfront, founders should always have that period that
Maria touched on earlier.
And this is a way that you can ensure that if someone does walk away early, they're not
(10:35):
leaving with a huge chunk of equity, which could obviously impact your fundraising in
the future.
And I think, as I mentioned, have a founders agreement where you have defined roles and
commitment levels outlined from the very early stages.
Who does what?
What happens if the founder doesn't contribute?
Exit clauses to really put in place some sort of ideas around what to do in these situations
(10:56):
and a plan for the equity dynamics as well.
So one of the feedback that we've in our previous episodes is try before you buy,
essentially, like work together and build those muscles of communication because they
don't necessarily come naturally.
As human beings, we're likely to not want to have difficult conversations.
So building those muscles together before actually getting to a situation where it then
(11:16):
gets extreme like this.
The other thing, and I think Yvonne has touched on it, is the contract and the agreement
is very important off the bat.
Just to give a sense of what's happening, I already touched about the vesting clause.
If that was the case here, maybe the founder could have gone away with much less equity
and the business can still continue.
But if their co-founders and this play for equal in and now they're in a deadlock situation
(11:38):
one person is not speaking, the business cannot go forward.
I would say that in retrospect, a contract, but beyond a contract, a vesting clause, a
buyback clause, how do we get, if anything happens, if priorities change, things happen,
how do we get it back?
But I want you to know that despite all of this, if there's a breakdown in the relationship,
I've seen it, it doesn't matter.
(12:00):
Things just get really messy and things get really bad, which is why who you choose as
a co-founder at the background is really critical.
I would say keep trying to have that conversation, but if it comes down to it that you can't,
you might have to exit the business and move on.
I think the founders agreement vesting schedules would have probably alleviated
some of these problems.
(12:21):
Now let's jump back into our tips.
Welcome back.
So on the second tip is raising the right amount at the right time.
It's tempting to take the largest check on offer, especially if you get that opportunity.
You just started, someone is offering you an incredible amount of money as the valuation
for your company and you're like, yes, that's not what your company is valued at because
(12:43):
you don't have revenue yet, most likely valuation is very nuanced in early stage.
So it's still very much changing, but in that early stage, some founders might raise too
little.
And we often see this actually with founders who are like, Oh, I don't want to give too
much of my company too quickly.
That's that general sense is okay, but you can raise too little at a too low valuation.
(13:06):
And then some people...
It's really a balancing act.
It's very hard because you can't say raise this amount because it really depends.
And you know what?
It actually also depends on the business model.
Don't you think there are some business models that don't actually need you to raise
that much money.
And there are some that counter-intuitively need you to.
So for example, I was speaking to a founder recently and she was talking about a space
(13:26):
tech startup that's building space tech.
Both software and hardware.
You can't give the same advice for SaaS companies, for a space tech company that needs
infrastructure.
And beyond even the infrastructure, they probably need to be very well capitalized before
they can get on some of the clients that they need.
Or maybe like a financial regulated startup that needs some heavy capital requirements.
(13:47):
So I guess the gist here is really figure out how much your business needs and try not
to raise too little or too much.
But I would say to just end my thoughts on this one is it's really not about the valuation.
It's about the dilution.
From a venture SaaS standpoint, we tend to see between 15 to 20% or 10 to 20% dilution.
Some founders go as low as five and some go as high as 30, but those would be extreme
(14:10):
cases in my opinion.
Yeah, 30 is definitely.
And I think just coming back to that point around how you should think about what you
need, how much the valuation should be.
Key thing in my opinion is just really around what milestones can you achieve with the money
you raise to help you get to that next round.
Because really when you do raise the round, that should just help you get to that next
(14:33):
phase.
Just another key point that I wanted to draw out.
Now let's talk about the company valuation.
So many founders, I think, focus on really getting that highest valuation possible.
But actually the high valuation can cause issues later on down the line.
So 2020, 2021, we saw a number of companies raise at significantly high valuations.
But when they came to raise their next round, if they hadn't had the growth to really grow
(14:56):
into that valuation, then it caused a number of issues.
So let's put it into perspective.
Let's say you're a pre-seed company, you raise that valuation of say 50 million.
You then go on to raise your next round.
However, revenue is only 100K.
How do you justify that next round valuation?
And so that's another thing that you should really think about.
So I've had a number of companies approach me, haven't raised rounds at significantly
(15:19):
high valuations.
They go to raise their next round and it's really hard to grapple with trying to either
come in at a higher valuation or what you don't want is a down round.
But some companies have to do that.
Facebook had a down round, right?
It's not the world, but you want to avoid that because it means that you result in extra
dilution when you don't really need to, if you had just had a reasonable valuation at
(15:41):
every given stage.
Yeah.
And it's so interesting because there's the high valuation part, but there's also the low
valuation part.
There are founders that I know that have raised on incredibly low valuations where it's, this
is not a venture investable company anymore because someone owns like 60% of the company
and it's not even the founder.
(16:01):
I'm like,
I was like, a founder had said that they gave away like 50% and this was like a seed state.
They were raising a seed round and I was just like,
no investor is going to come into that.
Yeah.
And it's not just because they don't have enough room to actually participate in the
company.
It's also if you, the founder have 10% of the company, I'm sorry, you're not incentivized.
There's nothing you can tell me.
(16:22):
Like you're not going to work as hard on the business as if you had a more significant
percentage.
And this changes obviously over time as the business grows, there are companies right
now that IPO, the founders own single digits.
It's normal later, but the earliest stages you want to have enough.
Now on the low valuations where I tend to see this happen is sometimes with accelerators.
(16:45):
And this is a double edged sword because there's some really good accelerators or programs
that it's worth the ownership because of the value that they create and they unlock very
quickly for you to have a higher value and kind of de-risk you, but not accelerators are
made equal and you should do your research.
Another thing that I see, especially with first time founders is maybe you just started
and maybe there's an angel who says, oh, this is exciting.
(17:07):
I want to invest, but they're like, I will take 40%.
You're like, you don't really know yet.
I own 60% still, so that's fine.
No, you really need to think about this in the context of your business model.
What's typical, the funding you would need to get to the outcomes that the angels and
the investors are expecting of you later down the line.
And I know that some of our listeners and our audience don't necessarily, you're not
necessarily building just tech startups.
(17:29):
So this is very much the VC tech type startup.
If you are building a tech startup, this example makes sense, just to give you a sense.
Every VC expects that you will raise money, you will continue to raise.
We talked about this in one of our previous episodes where we're like, if you're going
on the VC track, you're probably going to need to raise.
And you might start at, let's just give an example, 500K at a 5 million post-money valuation.
(17:51):
Now post-money is just after we invest, that's the valuation of the company.
It adds the money we invested into the valuation.
And then you raise other rounds, 1 million at a 10, 10 million at 100 million, 500, 300
at a billion.
Now you're a unicorn.
After all of this, if you are a two founding team and you started with 85 or 90% at the
beginning of your company, let's say you kept 10% aside for employee stock options.
(18:16):
You now have about 17% of the company individually after all of this dilution because of the
money you've collected.
Now this is assuming that the investors don't even ask you to increase your equity allocation
pool or something else dilute the shares.
There's a lot of assumptions in that and I would even say that's a conservative estimate.
(18:36):
So just to let you know that as you raise money, you are getting more diluted and tracking
In fact, one of the founders that I spoke to recently said he's a lawyer and he's a
founder and he's been a founder for six years now.
He's even, I was shocked by how diluted I was over time.
The founders don't think about it and you really need to do the math.
(18:57):
You really need to bring out that Excel sheet and say, if we raise at that, then we're
at this valuation.
How much does that dilute us and scope so forth and so on?
Absolutely.
Tip number three, negotiate terms beyond valuation.
Many founders focus solely on the high valuation as we touched on before, but seemingly
investor friendly terms can lead to unintended consequences.
(19:22):
Yeah, beyond valuation, there are things that impact your equity.
So it's also rights.
It's things like share class.
It's things like your information rights.
It's things like where investors have say or not.
So I would say like the entire gist here is beyond the value of the company.
There are many other things that you can actually use as levers that ultimately impact
(19:45):
the equity.
So just really thinking about that when you think about your negotiation on the cap table.
Yeah.
And I think there's many great lessons in history as always.
So if you look at SNAP's Ivan Spiegel, he structured his fundraising rounds with dual
class shares, for example, and really ensured that he retained voting control as new investors
came in.
Now, this won't work for every investor, but this is why it's really important to think
(20:07):
about everything from like liquidation preferences, voting rights, board control.
It's just as important as the valuation and the money that you have coming in.
Yeah.
And I would say that if you think about the different levers, so for example, dual class
shares, actually Mark Zuckerberg used this very well to retain ownership and control.
I would even say like more control than ownership.
(20:31):
And if you think of dual class shares, so just like very quickly, shares, you're essentially
selling pieces of your business, but you can literally create classes of shares that have
things that they can do and they can have super voting.
They can have rights and you offer the shares to investors that have maybe lower rights.
And then you keep shares to the founders or certain investors that have higher rights.
(20:55):
Now, a huge caveat, we're not all Mark Zuckerberg.
There's a dynamic in terms of leverage experience that you might be able to use as leverage in
this conversation.
Many times you can't quite pull these things, but they're good to know because at the end
of the day, as a founder, you're still in the driver's seat, right?
You can decide whether or not you accept a check or you don't and what terms ultimately.
(21:18):
Now, dual class shares allow for that.
It's just essentially creating separate class shares that allow for you to do more things
on one than the other.
Mark Zuckerberg, like I was saying, actually did this where his shares, the founder's shares
actually have super voting rights.
So say for example, Class A and Class B, they have a hundred million shares and on the Class
A shares, it's not one for one vote.
(21:40):
It's actually each vote counts as 10 votes, but for Class B shares, it's one for one.
If somebody did a vote based on the number of shares, it will count as one.
So just imagine how that skews the conversation where on one class, it's 10 votes to one share
and another class is one to one.
Then the other one is liquidation preferences.
This one is very important because people don't really think about it.
Now, I'm not a lawyer, but when you think about share classes, they're actually usually
(22:03):
in two classes.
There's usually a common class share and there's a preferred share.
The common class share is often what is traded publicly, but for private companies, sometimes
there's a preference share and that preference share is what investors tend to want.
And the reason why it's a preference share, if you hear the name preference preferred,
is that in the hierarchy of when maybe the company gets an exit or is bought or sold,
(22:25):
that preference share is actually higher than a common share.
Most founders, their share class is actually common share.
So there's almost like a hierarchy.
It's usually debt, preference shares, and then common shares.
So after you've paid your debtors, the preference shareholders who are often the investors,
so think about an exit.
Your investors will collect their money first.
Now, this is where liquidation preference is coming.
(22:47):
If I invested $10,000 and I have a 1X preference share, I'm saying that when you're paying
in terms of the arrangement, pay me the preference share holder, pay 1X my original amount.
So 10,000, I get my 10,000 back and then I get whatever I need to get from common shares,
because oftentimes there's common shares equivalent as well attached to the preference shares.
But if it's a 2X, even though I invested 10, when the exit conversation is happening, you
(23:12):
will pay me two times my original 10,000.
So that's 20,000.
Now, imagine if I invested 10 million, 30 million, 100 million.
It means you need to pay me that X factor, 2X, 3X of what I originally put in.
This can be dangerous.
As a founder, you might not get any money at the end of the day, because everybody has
all these preference shares.
(23:32):
You could get the highest valuation, but if the liquidation preferences are not in your
favor, that might not actually work out well for you in the long run.
Yeah, no, absolutely.
And along with liquidation preferences, coming back to voting rights, as Maria
touched on earlier, if investors get voting rights, I think it's really key to try and
ensure that they are proportional to their ownership and do not exceed standard investor
(23:54):
privileges.
One book that I really recommend when it comes to all things technical, legal, when it comes
to the way in which venture deals are actually structured is Venture Deals by Brad and Jason,
a highly recommended book.
Personally, I don't think any founder should raise money without reading this book.
Yeah, the basic knowledge is around all things to do with term sheets and the documentation.
(24:16):
Now, the other thing that I want to highlight is limited protective provisions.
Now, oftentimes in investment docs or when you receive your term sheet, you will see
that there are certain rights and things that require investor approval.
Now, this is pretty standard and it can include everything from hiring executives to how much
you spend on particular areas of the business to even selling the company.
(24:38):
However, one thing I do want to highlight is where there may be overly restrictive terms,
that's something that you just want to push back on.
And so it's really important that you have a good view on what some of those overly
restrictive terms are so you can push back on that.
So again, it's not just about the money, it's not just about the valuation.
You really need to understand some of these legal technicalities as well because it could
(24:58):
have a substantial impact on the way in which you run your business and how you actually
navigate your journey as a founder.
Now, we have a bonus tip for you.
So hang on.
Fantastic.
Now, welcome.
Our bonus tip is smart equity structuring.
Another thing to think about is not just how much you give away, but how you allocate it.
(25:19):
One thing to note is that to keep your cap table clean and your cap table is essentially
your list of shareholders, you want to syndicate small checks into an SBB.
So when you start off, oftentimes you're starting off from checks from friends and family,
maybe a couple of thousand here and there.
It's very difficult administratively to have all of them in your shareholders agreement
(25:39):
doing that.
Now we have things like safes.
We have some legal agreements that make it easy to do, but still you probably want to
coordinate people into one entity and have them sign agreements as a whole entity because
they are smaller checks.
This will save you a headache later down the line when you're trying to get everyone to
agree to things.
There are platforms that actually help you do this very simply.
(26:01):
There's AngelList.
There's Odin here in the UK.
There are a few other platforms.
Check them out.
This is not a sponsored statement by the way.
It's just, these are things that you can leverage.
So yeah, really think about structuring and the admin of your equity as well.
Yeah.
And be really smart around how you structure your equity as well.
If you have an employee share option pool, you actually don't have to just allocate that
(26:25):
to new employees.
You can actually continue to distribute that to existing employees as a way to incentivize
them.
And actually one of the founders that we spoke to as we were thinking about this episode
share the fact that in one of his companies, he actually thought about distributing some
of those option shares to his existing founding team to incentivize them over the year.
(26:47):
So every year they would distribute some of that as a great way to incentivize them and
increase their equity ownership over time.
And so you can actually get really creative with how you think about incentivization.
This is not like one playbook for all companies, really think about what works for you and
you can get creative as well.
When you think about share options, a bit of a technical point, but share options are
(27:09):
not technically shares off the bat.
So it's just a pool for shares you allocate.
So options actually mean something completely different.
You have to buy the option, almost like a right to buy.
So when you issue it, they actually have to buy it, but it's often at a discount to its
future price.
So it can be very lucrative.
So there's still that nuance there.
But especially in VC, Yvonne, I'm sure like 100% of the founders you've invested in, at
(27:35):
least for me, it's 100%, maybe even close.
It's like they all have a share employee, like an ESOP, like an option pool, because
at the beginning you can't compete on salaries.
You don't have it.
So there you have it, three key ways to preserve equity and one powerful bonus tip we have
for you as well.
Be strategic with early equity allocation with co-founders and advisors.
(27:57):
Raise the amount at the right time that you need.
Negotiate terms beyond the valuation.
And don't forget the power of smart equity structuring.
Absolutely.
And yeah, managing your cap table wisely can be the difference between success or failure.
If you found this episode helpful, make sure to subscribe, leave a comment, tell us what
you think.
And remember, this episode was actually as a result of someone commenting and saying
(28:20):
that we should touch on this.
So if there are any topics you want us to really deep dive into, we'd be more than happy
to do that.
So thanks for tuning in and we'll see you next time.
See you next time.
Leave a review.
Tell us what you think of this episode on all our platforms at the Startup Leap port.
Do you have a question?
Ask us and we'll ask our guests.
Go to the startupleap.io.
(28:41):
See you next time.
Popular Podcasts
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.