Key Equity Terms

Equity represents the ownership stake in a startup.

Here are some key terms to know about equity.

Vesting — the transfer of equity ownership from the company to the employee.  

A typical vesting schedule is four years.

Each month a portion of the promised equity is vested which gives the employee ownership over that portion.

One-year cliff — this term is used with vesting and indicates vesting starts after one year.

Companies do this to encourage employees to stay at least a year. 

Options — a contract giving the holder the right to buy shares at a specified price later.

Strike price — this is the price the holder will pay for the options. The difference between the strike price and the market price is the gain the holder receives.

Stock options — for non-qualified stock options you’ll need to pay tax on the difference between the strike price and the market price. 

For incentive stock options, you’ll pay capital gains tax on the gains when you sell the shares.

Liquidity event — this is an event such as selling the company or going public on the stock exchange.   It creates liquidity for the shareholders.

Preference stack — this is the order of payout to the shareholders based on term sheet clauses.  This puts some shareholders first by way of a liquidity preference.  The remaining shareholders get paid from the remaining proceeds.

Consider these terms when dealing with equity negotiations at a startup.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

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