*By Ameen Ahsan Strategy Consulting*
Equity is a startup’s lifeblood. And, just as with any other element of building a successful business — putting the right team in place, setting and hitting milestones, and effectively managing cash — developing your capital strategy is an important a piece to get right.
One thing to remember: your equity is precious: don’t be lavish in giving it away. On the other hand, being too stingy will make it hard to attract talent, advisors, and investors.
When a company is created, the founders of the company must determine who owns the company. Often the founders also become the first shareholders of the enterprise. The first, and most important, step in getting a company organized, is to determine who owns how many shares. This is usually expressed as a percentage of the total number of shares and it is this percentage that is very important to each founder.
Over time, the ownership of a company will change as new participants, e.g. managers or investors, are dealt in. It is never easy to figure out how should get what share of ownership. It usually boils down to a matter of negotiation among those involved.
When the founders have agreed on the ownership percentages (i.e. percentage of common shares issued), they can then determine how many shares in total to issue. This number is usually kept small at the beginning, e.g. 100 or 1000. This number can be "split" (multiplied by 2, 10 or whatever) as required. If the company plans to eventually become a public company, the number of shares and the price paid for these shares becomes more important and proper structuring at the outset (with appropriate counsel) is advised.
Be sure to get some good professional advice. But before doing so, you should know what you and your fellow shareholders' goals are and what your vision is for the company - then you can properly "structure" the company to help you achieve these goals.
*Ameen Ahsan Strategy Consulting*
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