In our last article we outlined the main differences between the 2 financial components of your compensation package as a startup employee: salary vs. capital.
Today, prior to further explaining how equity incentives work, we’d like to give you an overview of the 4 basic pieces of knowledge to master when it comes to equity incentives.
1. The Share Capital of a Company
The capital of a company is essentially composed of people, individuals or companies, holding a stock or an option: the shareholders and stakeholders. The capital is the motherboard of a company as it is the basis of 2 strategic components:
- Economic value: this refers to the resources created by these stakeholders or its activity, reflecting the economic value of the corporation.
- Governance: this provides the rules through various contracts (by-laws, shareholders’ agreement, etc.), and connects all these shareholders and people holding options together by establishing proper governance and the distribution of the economic value.
2. The Value of a Share
A company’s worth, or its total value, is called its market capitalization, or “market cap”. It is represented by the company’s stock price multiplied by the number of shares and options held by its shareholders. Although it is often used to describe a company, market cap does not measure the equity value of a company.
Only a thorough analysis of a company’s qualitative (founding team, governance, etc.) and quantitative (financial, economic, etc.) information can do that. It cannot value a company because the market price on which it is based does not necessarily reflect how much a piece of the business is worth. Shares are often over or undervalued by the market, meaning the market price determines how much the market is willing to pay for its shares.
3. Private Companies
A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO).
In general, the shares of these businesses are less liquid and their valuations are more difficult to determine, mainly due to the lack of available accurate information on the market.
4. Public Companies
Although a small percentage of shares are initially floated to the public, daily trading in the market determines the value of the entire company by the mechanism of supply and demand for its shares in the market. It is considered to be “public” since shareholders, who become equity owners of the company, may be composed of anybody who purchases stock in the firm.
Ekwity’s mission is to help entrepreneurs to share the value with their team. Our goal is to save entrepreneurs’ time and hassle while providing the best assistance in designing and implementing a tailor-made employee stock options program (ESOP).
- Comprehensive knowledge base of benchmarks/best practices in employee equity throughout Europe
- Advisory services with the best experts to set up a company’s employee option program based on their specific business needs
- Training on employee equity from general introduction to the creation of specific communication material for your in-house teams
Interested in our services? Contact us now!