Creating equity for your startup is an essential part of ensuring a successful launch. Equity is essentially a claim on the assets of the company and a share of the profits. It can also be used to raise venture capital as investors are likely to be attracted to the prospect of owning a portion of a growing business.
In this article, we take a look at what equity is, the different types of equity, and the best ways to distribute equity for maximum benefit for your startup.
What is Equity?
Equity essentially describes the ownership of the company and is usually within the form of stock or shares. It gives the holder certain rights such as voting on certain issues, eligibility to dividends, and the right to receive a portion of the assets when the company is dissolved or sold.
Types of Equity
Equity can come in many different forms, depending on the type of organization and the interests of the parties involved:
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Common Stock: Common stock is the most typical form of equity, and it grants the holder voting rights and the potential to partake in potential profits.
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Preferred Stock: Preferred stock gives holders a fixed dividend, meaning they receive payment even if the company does not make a profit. Also, they’ll have priority to any proceeds should the business dissolve or be sold.
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Restricted Stock: Restricted stock requires an investor to hold the shares for a certain period of time in order to obtain the incentive associated with them.
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Warrants: A warrant grants the holder the right to purchase a certain amount of a company’s stock at a predetermined price.
How to Distribute Equity
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Aim for a Balanced Portfolio: You should have a balanced portfolio of different types of equity, rather than only focusing on one form. This means having a mix of common stock, preferred stock, restricted stock, and warrants.
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Offer Incentives: Equity can be a great way to reward and incent employees, partners, and investors. Offering equity incentives is an effective way to attract and retain talent.
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Understand the Risks and Rewards: Equity can be a high-risk investment, as you are essentially giving away a portion of your company. Be sure to clearly define the risks and rewards to any party involved before offering equity.
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Discuss with Potential Investors: You should have open and honest discussions with potential investors about the equity structure of your startup. Potential investors may want a certain percentage of equity in exchange for their money, which you should be prepared to offer.
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Get Professional Advice: As equity can be a complicated legal and financial instrument, it is best to consult with professional advisors such as lawyers and accountants to ensure that you are distributing equity in a way that is in the best interests of your company.
Distributing equity for your startup is an important part of ensuring its success. It is most beneficial if you have a balanced portfolio of different types of equity, offering incentives to your employees, partners, and investors. Also, be sure to have a full understanding of the risks and rewards of offering equity, discuss the terms with potential investors, and get the advice of professionals.
