An 8-Min Introduction to Startup Equity

Josiah Humphrey
Aug 6, 2017 · 8 min read
Originally published on http://www.appsterhq.com

Why Care about Equity?

1. Equity (Shares & Stocks)

“The basic idea of startup equity is rather simple:

In their early years, young companies don’t have the capital to pay employees a competitive salary that’s made up entirely of cash, so the companies compensate employees in part with stock in the company, or equity.

The arrangement incentivizes employees to work extra hard and in the best interest of the business because if the value of the company grows, so does the value of their equity.”

2. Options

If you receive stock options — the most common form of employee equity compensation — you get the right to buy stocks at a predetermined price, or strike price.

You ‘exercise your options’ when you purchase the underlying stocks at strike price. The company is legally bound to set your strike price at what is deemed fair market value of the company stock when the options are granted to you.

So, if you were granted stock options with a strike price of $1, and you were to exercise your options on that same day, you would pay $1 for each stock, and own that stock valued at exactly $1. You would have a net gain of $0. As company grows over time, however, the value of stock would rise.”

3. Vesting

“A technique that allows employees to earn their equity over time.

At startups, equity typically vests over four years, meaning employees must stick around for four years in order to own all their equity.

If employees leave the company before the four-year period is up, they only receive a percentage of their stock based on the terms of the vesting schedule.”

4. Equity Dilution

5. Capitalization (“Cap”) Tables

“A capitalization table is a spreadsheet or table, typically for a startup or early stage venture, that shows ownership stakes in a company, including equity shares, preferred shares and options, and the various prices paid by stakeholders for these securities.

The table uses these details to show ownership stakes on a fully diluted basis, thereby enabling the company’s overall capital structure to be ascertained at a glance.”

Why do startups need cap tables?

“If you are recruiting a new COO and the candidate asks for options covering a certain percentage of the company, you need to be able to quickly determine not only whether you have sufficient shares available in your option pool but also how dilutive the new grant will be to other holders.”

Final thoughts

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Originally published at http://www.appsterhq.com

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Josiah Humphrey

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