There are a few main components to consider when dividing up a company to be ready for investment. The first one is to get a good lawyer; this is a tedious process and best handled by a professional. But you should still have an understanding of what you’re talking about. I’ve outlined below some of the most common areas and topics involved in the division of equity.
This is the actual equity you own in the company. Simply put, it’s the reason you started and is cashed in when you exit the company.
This is commonly tied to employees, but can be for founders too. Vesting is the process of being drip fed equity over a time period. It forces people to be committed to the company and acts as a disincentive to leave a startup in the early days.
Speaking of joining startups early, you’ll need to save some equity to motivate early hires with. We call this as an options pool. You hand these golden tickets out to staff and high performers. A normal options pool is around 10% and can be cashed in when you all exit the company.
A controlling share belongs to whoever owns the majority of shares. This person or group controls the board and the decision-making power of the company. This can be affected by share classes who may have different voting rights (see the Facebook board).
This is what happens when you sell stock in a company. You don’t create more shares per say; you just equally dilute each other’s shares. Let’s say, between you and your co-founder, you own 50% each. Then, you sell 10% to an investor – you now own 45% each as you split that dilution evenly between you.
There is one exception to this concept, which is called a non-dilution clause. It prohibits an investor’s shares from being diluted in later rounds.
“The Cap Table”
This is what holds all the functions mentioned above. When someone refers to their cap table, they are speaking about the structure and equity situation of the relevant company.
So, before getting into the this game of equity, get some insights from a good lawyer, and read as much as you can on this expansive topic.