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How To Split Equity In A Company
By : Raad Ahmed
April 2015
IT’S MINE NOW!EVERYTHING ABOUT STARTUP EQUITY
BROUGHT TO YOU BY
LAWTRADES
IT SEEMS LIKE YOU’RE ON THE RIGHT TRACK…
AND YOU ARE STARTING TO HIRE EMPLOYEES…
HOW TO COMPENSATE THEM?
WITH SALARY AND…
EMPLOYEE EQUITY!
THERE ARE 3 MAJOR ISSUESBut nothing that you couldn’t handle with a little legal help
PROBLEM 1: HOW MUCH TO GIVE?Both founders & employees deserve a premium on their risk
SOLUTION A: EQUITY FORMULAMath approach to people problem
by Paul Graham
HOW DOES IT WORK?
n = (i-1)/in - value of a new employeei - how much a new employee will help the company (eg. increase
SOLUTION B: SEGMENTATIONBusiness approach to people problem
HOW DOES IT WORK?
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
PROBLEM 2: WHEN TO GIVE?Equity should be motivating, so let’s not release it all at once
SOLUTION: VESTINGA plan for giving out equity compensation
HOW DOES IT WORK?
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 PLAN4 years of vesting + 1 year cliff
This should be changed to serve individual situation
PROBLEM 3: AVAILABILITYSometimes exercising equity rights can be problematic
SOLUTION: LONG EXCERCISE WINDOWS
HOW DOES IT WORK?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
SOLUTIONAllow employees to exercise equity rights for
10 years after those are granted
SO WHAT TO DO NOW?
VISIT
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with no obligation to hire!