Startup Equity Basics

Equity is an ownership stake in a company represented by shares.

The three stakeholders are the founders, the employees, and the investors.

Founders start with all the equity and then create and give shares to investors and employees in return for funding and labor.

This additional equity reduces the value of the founder’s shares which is called dilution.

The value of a share of stock is the total value of the company divided by the total number of shares outstanding.  

The number of shares authorized doesn’t matter.

Stock options give the holder the right to convert to shares at a later date.

An incentive stock option gives the holder the right to buy shares at a discounted price.

A non-qualified stock option gives the holder the right to buy shares at the grant price.

In a startup you can calculate the value of your stock by taking the most recent valuation and dividing by the number of shares outstanding.

Stock options and founder’s shares are often placed on a vesting schedule.

This is the number of years it takes for the holder to gain ownership over the granted shares.

Vesting is a mechanism to retain employees and founders till the work is completed.

Additional funding dilutes the value of the holders’ shares as it generates more shares outstanding.

The capitalization table (also called the cap table) lists the owners of the company and their percent and shareholder value.

It’s important to know these terms in dealing with equity in a startup.

 

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

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.