You have finally decided to start a new business, your own business. You have – almost – everything in place: a brilliant (“unbeatable”) idea, some smart co-founders to share your journey with, and an ambitious business plan. Likewise, you are concerned about liquidity; or you want to keep the most significant piece of ownership as you believe, of course, your business will be successful, or you are merely wondering on control of the company. It is a common scenario, not worry. The ownership of the business is why you have decided to join or form a start-up company, right? It is then essential for a new business to ensure that this ownership is well-tough out since its inception.
Dividing founders’ equity, coming up with vesting terms on equity, allocating equity to employees, and putting in place decision-making protocol is vital. And it is, undoubted, that a startup lawyer may help you address “tricky questions” at the right time, ensuring that an efficient and flexible capitalisation structure is in place beforehand.
In this article, we will focus on allocating founder ownership, identifying who is a founder, how to protect founders in the event of termination, and how to plan for future investors or employees.
A Startup lawyer in London can assist you with Identifying founders
The first thing you ought to focus on is who can be qualified as founders? It can seem banal, but in most of the cases, almost everyone within your “dream” team will pretend to be a founder. Excitement, fair of excluding people, or merely underestimating of the situation is one of the reasons why you might end up including in the founder team much more people than it should be.
The distinction is essential, though. Founder stocks often enjoy unique status as to options, investors, and other shareholders. So, you should pay due to consideration in limiting the granting of founder status to only those who are really bringing value to the company. For all the rest of your team, think about alternative incentives – for instance, stock option plans.
Dividing equity among funders. Get Startup Legal advice London
To determine how to divide founders’ equity, you may use a startup equity calculator. This is specifically designated for those who do not have a specific understanding of the process.
Start with making yourself a few questions, including but not limited to:
- Who is the CEO?
- Who had the original idea?
- Who is coding most of the app?
- Who is responsible for marketing?
- Who is writing web content?
- Which founders are full-time?
- Who pitches investors?
Based on the answers you give to the above questions, you should be able to determine how to divide founders’ equity correctly. And a startup lawyer can help you.
Stock option plans for your employees.
Building an equity incentive plan at the very early stage of your company is a smart decision if you want to avoid piecemeal dilution later on.
Especially in the high-tech market, employees (experienced in their fields) may ask for equity compensation as a part of their employment package. Likewise, founders may want to use additional equity to be appealing to “smart minds” who work for big corporations, or they want to offer equity instead of a salary: how many start-up companies start with low funds and have no resources for hiring?
Example. A Start-up believes its stock is currently worth £ 1 per share; hence the exercise price is set at £ 1 per share. John, as an employee, gives the company £ 100 and get 100 shares. He does not need to pay now. He may exercise his right in 10 years when eventually his stocks will have a higher value. Likewise, John may also decide not to exercise his right.
How to protect startup founders in the event of termination
Vesting imposed on your stocks
Why should you think about measures to protect you in case of termination? You have just commenced your adventure. Everything seems perfect. Your plan is superb, and your founder team is ahead of the competition. That being said, even the most romantic love stories sometimes breakdown, and so do business relationships. Just a few start-up founder teams overcome the first year with no issues.
The discussion of vesting is, therefore, necessary, despite everyone in your team preferring to own their stocks outright. And below you may find the principal types of vesting.
Stock is realised from vesting in equal amounts each month over a specific period.
Example. Monthly vesting over three years.
After 18 months of employment, John, a founder, leaves the company. He would own the only ½ of the original stock issues to him, whilst the rest of his ½ shares would be repurchased by the company at par value.
There is no vesting for a specific period, for instance, two years or until financial occurs. Once that period has passed, the company will release a particular portion from vesting. And the rest will typically be vest on time-based vesting.
John’s stock is vested over four years. The vesting will be a two years cliff, followed by monthly vesting over the remaining two years. John decides to quit after one year. He will have no shares issued, and the company will repurchase the entire number of shares issued at par value. As opposed, should John decide to leave the company after three years, he will have 2/3 of his stocks vested at that time.
Stocks are released upon the achievement of a specific milestone. For instance, upon funding (at least 2 million); or once reached a particular target in terms of revenue.
In releasing stocks, the company will consider both the achievement of specific milestones and time-based vesting.
Get in touch with our team of startup lawyers London
Would you like to know more? And foremost, do you want to get benefit from our flexible fee arrangements for a start-up? Do not be afraid. We have an innovative approach, and we can work as an extension of your own legal teams, delivering a flexible service and bespoke, clear, and commercially orientated advice.
Whatever stage your company is, we are sure, our startup lawyers in London can help. Contact us now, and we will be in touch within 48 hours.
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