Equity Allocation is the general term to describe stock ownership of a startup company. Common stocks are generally use for non-investors and preferred stocks with liquidation preference is reserved for investors. The tabulation of the distribution of stock is common referred to as the “Cap Table”.
First-time founders who have not had experience in creating equity allocation plans often lack the knowledge of generating equity ownership plan that is attractive and effective for hiring key employees, and also attractive to professional investors. First-time founders often make these common mistakes.
1. Co-founders have too high ownership
2. Not budget enough equity for future executives, employees, board members, advisors, & consultants
3. Co-founders use aggressive vesting schedule; insufficient shares to be vested over 4 years
The above errors in developing the company equity allocation plan makes it difficult to add talented senior key executive at a later date. The errors shown above would be a deterrent for professional investors as these types of errors gives the professional investors the impression that the founders are not structuring the equity plan to attract strong executives to be added later and company will have the disadvantage of trying to be successful without attracting talented people as the company grows.
1. The equity allocation plan should not have substantial ownership given to the founders.
2. There should be sufficient available Equity in the budget for adding new key employees: executives, board members, advisors & consultant
3. The Founders should not have the majority of their Equity ownership vested during the Initial refunding stage. A majority percentage of founders’ equity should be vested over 4 years period.