So, your startup has started gaining the traction you’ve always wanted now. Now, you want to reward your all-star team by offering them equity. As incredible as that is, evaluating and distributing startup equity is often not an intuitive process.

Startup equity software can help you plan, collaborate, and manage equity end-to-end. However, as far as getting the answer to the question, “who gets what slice of the pie?” goes, this guide will discuss startup equity valuation and distribution.

Startup Equity Valuation

As the company founder, you want to be thoughtful when sharing company ownership. Sky-high valuations may lead to “dreaded down-rounds.” On the other hand, low valuations may also lead to uncertain outcomes. So, what are some key factors to keep in mind during startup equity valuation?

Last Preferred Price

What were the investors willing to pay for a single share during your company’s most recent funding round? Use that as a reference to understand your startup’s potential for success.

Once the potential for success is clear, you can only proceed with evaluating equity and the share each stakeholder may receive.

Post-Money Valuation

This is another essential factor to keep in mind while evaluating startup equity. The post-money valuation shows your company’s broader value after a round of funding has taken place.

To calculate post-money valuation, add the value of new equity to the pre-money valuation or your company’s valuation before any investment rounds occur.

Number of Options in Your Company Grant

This factor is pretty straightforward and self-explanatory. This grant gives the stakeholder the right to acquire a certain number of your company’s shares.

As the name suggests, it is the number of grant options your company offers.

Hypothetical Exit Value

This value represents a company’s value at the time of exit. Meaning that it is the value at which a company is most likely to be sold.

For this, you may need to do a bit more research on how companies like yours have looked at the time of their exit. However, be aware that companies do not readily offer this information, so you might need to dig a little.

Strike Price

This price represents the price at which a derivative contract may be sold or bought when exercised. This information should be readily available in the offer letter.

You can use online calculators to help you determine the equity value once you know the strike price.

Distributing Startup Equity

Which slice of the pie goes to who is the mega question that follows? The answer to this will largely depend on how your company is structured. In most cases, equity distribution will look somewhat as follows–

• Founders and Co-founders – In the case of co-founder(s), distribute equity based on factors like the risk involved, level of commitment, and the degree of innovation.
• Employees – Factors to consider while sharing ownership with employees include the percentage of ownership, vesting schedule, employee awareness, and type of shares to be awarded.
• Investors – Determine what your angel investorsor VC firm gets by considering the size of their investment.
• Advisors – Though there are no hard-and-fast rules, advisors are usually awarded 0.2% to 1% of the total equity value.

Once the Pie is Sliced

Valuating company equity and distributing it among all stakeholders involved can be daunting. Then comes the process of managing and collaborating. This becomes easy to handle with a reliable startup equity software provider.

You may find benefits such as stock options management, scenario modeling, data portability, and monitoring of regulatory requirements. The results? You spend resources and time building your company instead of equity management!