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Equity Management
Don’t wait until too long before figuring this one out. Equity management is just keeping track of who owns your company and how much of it they own.
- A cap table is a document that shows who has ownership in a company.
- Having a clean cap table will be important during the due diligence process with potential investors.
- Founders must maintain a clear understanding of their company's ownership structure, ensure proper administration of equity-based compensation, and comply with legal and regulatory requirements to create a solid foundation for growth.
📺 Watch session with Carta
Equity splits & Insights on Fundraising on SAFEs with Carta
📖 Read Summary
- Capitalization table (cap table): A cap table is a document that outlines the ownership structure of a startup, detailing the percentage of ownership, equity value, and shareholdings of each shareholder, including founders, employees, and investors.
- Equity-based compensation: Startups often offer equity-based compensation, such as stock options or restricted stock units (RSUs), to attract and retain talent. Equity management involves creating and administering these compensation plans, ensuring they align with the company's long-term goals and remain compliant with applicable regulations.
- Stock options and vesting schedules: Stock options give employees the right to purchase company shares at a predetermined price (strike price) after a specified period or upon meeting certain performance milestones. A vesting schedule determines when and how these options become exercisable.
- Equity financing: As startups grow and seek additional funding, they may issue new shares or equity instruments, such as convertible notes or SAFEs (Simple Agreement for Future Equity), to investors.
- Investor relations and reporting: Maintaining transparent communication with investors is vital for building trust and confidence.
- Legal and regulatory compliance: Equity management involves ensuring compliance with applicable laws, regulations, and industry standards, such as securities laws, tax regulations, and 409A valuations. This includes filing necessary documentation and maintaining accurate records of equity transactions and grants.
📈 409A Valuations 101
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- A 409A valuation is an independent appraisal of the fair market value of a private company's common stock.
- It is crucial for offering or issuing equity to service providers to avoid IRS penalties for the company and equity holders.
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- Before issuing the first common stock options.
- After raising a round of venture financing.
- Once every 12 months or after a material event (e.g., approaching an IPO, merger, or acquisition).
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- Significant changes in revenue due to new or lost contracts.
- Material acquisitions with your company as buyer or seller.
- Receiving a term sheet from a potential acquirer.
- Strategic partnerships that open new markets or improve margins.
- Regulatory changes that significantly impact your addressable market.
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- Section 409A was introduced to prevent executives from taking advantage of equity loopholes.
- It provides a framework for private companies to follow when valuing private stock.
- A valuation conducted by an independent party establishes a safe harbor, which is presumed "reasonable" by the IRS.
- Non-compliance with 409A rules can lead to penalties, usually paid by employees and shareholders.
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- Standalone 409A valuations can cost between $1,000 and over $10,000, depending on the company's size and complexity.
- A 409A refresh is required after 12 months or after a material event, updating the valuation.
🐎 Resources
| Name | Exclusive Perk | Redeem Perk | On Deck Partner |
|---|---|---|---|
* Free access to Carta’s Launch Plan * 20% discount on any paid cap table plan | |||
Introductory discount of 100% off your first-year annual subscription |
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