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How to Split Equity in a Company
This document provides guidance on how to split equity in a company and compensate employees with equity. It outlines three major issues to consider: how much equity to give employees, when to give it, and ensuring employees can access their equity. For how much, it recommends either an equity formula approach or segmentation approach. For when to give, it advocates a vesting schedule to motivate employees over time. And to ensure access, it suggests long exercise windows so employees can access equity rights over many years to avoid tax burdens. The document was created by Raad Ahmed in April 2015 to help startup founders properly structure employee equity plans.
How to Split Equity in a Company
- 1. How To SplitEquity In A Company By : Raad Ahmed April 2015
- 2. IT’S MINE NOW! EVERYTHINGABOUT STARTUP EQUITY
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- 4. IT SEEMS LIKEYOU’REON THE RIGHT TRACK…
- 5. ANDYOU ARE STARTINGTO HIRE EMPLOYEES…
- 6. HOW TO COMPENSATETHEM?
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- 9. THERE ARE 3MAJOR ISSUES But nothing that you couldn’t handle with a little legal help
- 10. PROBLEM 1: HOWMUCH TO GIVE? Both founders & employees deserve a premium on their risk
- 11. SOLUTION A: EQUITYFORMULA Math approach to people problem by Paul Graham
- 12. HOW DOES ITWORK? n = (i-1)/i n - value of a new employee i - how much a new employee will help the company (eg. increase
- 13. SOLUTION B: SEGMENTATION Businessapproach to people problem
- 14. HOW DOES ITWORK? Put your employees into segments Segment 1 Segment 2 Segment 3 First 10 employees Aggregate 10% compensation Employees 10-25 Aggregate 5% compensation Employees 25-50 Aggregate 5% compensation Those exact numbers will vary depending on a situation, but this concept ensures quite fair equity distribution
- 15. PROBLEM 2: WHENTO GIVE? Equity should be motivating, so let’s not release it all at once
- 16. SOLUTION: VESTING A planfor giving out equity compensation
- 17. HOW DOES ITWORK? Vesting is a schedule, that plans when Employee will gain rights to all his shares after a set amount of time Motivation behind vesting is for the shares to be an ongoing motivator for an employee COMMON VESTING PLAN 4 years of vesting + 1 year cliff This should be changed to serve individual situation
- 18. PROBLEM 3: AVAILABILITY Sometimesexercising equity rights can be problematic
- 19. SOLUTION: LONG EXCERCISEWINDOWS
- 20. HOW DOES ITWORK? EXERCISE WINDOWS IS A TIME WHEN AN EMPLOYEE CAN EXERCISE HIS EQUITY RIGHTS PROBLEM = TAXES Exercising equity rights means income, which means taxes have to be payed Often more than the employee has SOLUTION Allow employees to exercise equity rights for 10 years after those are granted
- 21. SO WHAT TODO NOW?
- 22. VISIT LAWTRADES.COM LAWTRADES REQUEST FREE QUOTES fromexperienced startup attorneys with no obligation to hire!