To turn an ambitious startup idea into a well-established and authentic company, the basic requirements for any startup team primarily include two things, i.e., the money and the advice from various successful and experienced entrepreneurs. Along with the guidance and funding, while looking for a technical co-founder, you also need an all-star team that will help you build up your company. But in exchange for their services and talents, you need to provide them with equity, and the distribution of this equity among the various sections of your company is not an intuitive process.
In this article, we teach you about the startup equity calculator while teaching you the basis of distributing the equity correctly among the various sections of your company.
What do you mean by the equity in a startup company?
The equity in a startup company is generally defined as the percentage of its shares sold out to its investors. As a result, the investors will not only be provided with the company's ownership. Still, they will also be benefitted from their rights to the potential profits of that startup company. The equity in a startup is generally distributed among its investors in stocks.
As a startup gradually succeeds, its subsequent investors will be much more interested in funding more per share in the upcoming rounds of their funding. This factor is one of the essential keys that keep startups motivated to grow.
Who is eligible to get the equity of a startup company?
Generally, there are 4 different sections in a company that are eligible to get equity in a startup company, and they are as follows:
- Its investors.
- Mentors or advisors.
- Technical co-founders.
Initially, the owner is generally shared in percentages between the startup's co-founders in most typical cases. But for different startup companies, this combination of 4 groups can have different categories. And it is also to note that not all startup companies provide their investors, advisors, and employees with ownership.
How does the valuation of the startup equity calculator take place?
The working of a typical startup equity calculator takes place depending upon the following few factors:
- Considering the last preferred price range - during a startup company's most recent funding rounds, the investors are generally paid for every share depending on their previous price. These last preferred prices are typically used to measure a required startup’s potential success.
- The post-money valuation - the post-money valuation generally represents the company’s broader value after a funding round. It is typically calculated by just adding up the pre-money valuation of that company, i.e., the valuation of that startup even before the rounds of investments by its investors. Then the amount of new equity formed.
- The hypothetical existing value - the hypothetical current value is generally defined as the value of a startup at which the company would naturally exist. This means that the value generated by that required company would need to be sold. Unfortunately, startup companies do not readily offer this information. If you are curious about finding its accurate figure, you need to research similar companies to see what they look like.
- The number of options present in your grant is self-explanatory - the number of options current in the grant. The option grants are generally the right to acquire the total number of shares of a given company at the set price. To determine the total value per option available, you first need to estimate the actual value per share in the market and then multiply your current monthly revenue by 12 to annualize it and then later by 5x for multiple payments.
- The strike price is defined as the price per share that you would need to exercise your options. For the call options, this strike price can be used to buy the security by the option holders, and for the put options, the strike price can act as a price through which the deposit can be sold out.
How can we negotiate the equity in a startup?
- Keep your eye on the length of your vest- the share vesting generally works using a simple logic stating that the longer you can work for a company, the more shares you will be provided with. This arrangement is mainly designed to prevent the employees from existing quickly. Therefore, if you have a strong track record in substantial experience or are a leader, you can quickly vest your time to three years.
- Keep an eye for the cliff edges- the vesting cliff is typically the initial cut-off after which the employees become eligible for receiving any shares in total. In addition, the cliff is generally the waiting period after which you will be receiving your stock options.
If you have a cliff of one year, all your required options starting from the first 12 months will be vested collectively at your 13th month. Starting from this point, you will be receiving your shares quarterly or monthly, depending upon your agreements with the company.
Do spread the load equally- sometimes, larger volumes of shares get allocated later if you have an extended vesting period. Several social networks and ecommerce startups generally have such vesting schemes that place their incentivized team members a stay for as long as possible. Providing their employees with a fourth of their options per year, they provide them with 10% of the total share within the first year, 205 in their second year, 30% in their third year, and 40% in their fourth year.
Generally, the startup life promises you personal development and a chance to build an organization that changes the world. Therefore, before getting your startup equity calculator worked on and distributing them, you should make sure to get your proper research done by speaking to your peers about the net worth of your company, investors investing in your startup, and keeplooking for technical co-founders with whom you can discuss unique solutions regarding your startup’s growth.
Further, you can also hire any software company as your tech cofounder as they have a deep technical knowledge because they develop different software and services for their client. One of the ideal companies we recommend is iScripts. iScripts have developed a wide range of technical products such as Multi-Restaurant Platform, On-Demand Service Platform, and more.