Startup Equity refers to the value of your stake in the startup. Initially, when the startup is just an idea, it belongs to only one person. When you start building this idea into an actual product, you realize you require more people and more resources.
You might be good in technology but not in negotiation. So, you always need someone else who can complement your skills and help you build your startup. This person would be your co-founder. Once you get hold of this person, there is one big question. What do you give him/her in exchange?
Your startup is just in the initial stage now and all you have to offer is your Startup equity. Till now all the Startup equity was concentrated on one place. From here on, Equity dilution will take place. You would need to share your precious pie with other people.
At later stage of the startup, outside funds are required. The people who would fund your startup are known as Investors. For investors too, you would need to share your Equity Startup. Here again, your Equity will be diluted.
Initially, not much revenue is generated from your startup. So, you are not able to offer higher salaries to your initial employees. To compensate for lower salaries, founders offer their employees a share in their Startup Equity. This is usually called Sweat Equity or Employee Stock Option (ESOP).
As a founder, you are faced with the dilemma of how to distribute or split your equity. It is very important to distribute equity fairly and judiciously. There are a lot of factors that you need to consider while distributing equity among co-founders and investors or employees. To help you make informed decisions, we bring to you a list of tools.
1. Startup Equity Calculator
Startup Equity Calculator is an equity calculation tool. The calculator would tell you the optimum distribution structure for your startup. You are required to answer a few scenario-based questions about your startup and your co-founders.
If a question is not applicable to your start-up, leave the answer field blank. When you submit the answers, the tool will give you the optimum equity distribution structure. This tool only calculates equity distribution among co-founders.
2. Equity Investment Simulation
Equity Investment Simulation tool will help you measure equity distribution at every round of investment. The first part of the tool deals with the initial distribution of the Startup Equity between the co-founders.
The subsequent parts deal with equity distribution after each round of investment. It assists you in distributing the equity between co-founders, investors and ESOP fairly.
3. Startup Economics
Another popular tool for calculating Startup equity distribution is Startup Economics by SmartAsset.com. It is basically an interactive infographic. It helps you understand and analyse how your equity structure would change with equity dilution.
The tool asks you to put in the number of founders, number of shares issued initially, share distribution etc. You can also add funding events, advisors and employees and exit events to assess their impact on equity distribution.
4. Founder Equity Solutions
Foundersolutions.com presents an easy-to-use tool that helps you in distributing your Startup Equity. Founder Equity Solution helps you in distributing Equity among Co-founders in a fair manner.
The tool takes into account:
- Financial Contribution made by the Co-founders
- Prior Startup Experience
- Their roles and responsibilities in the Startup
- Future expectations from Co-founders
This tool helps to make a better decision than a rule of thumb criteria used by many startup founders.