Pheeeww! So good to be back, sincerely, after a three days sick leave😢😢
I guess this is the point where I welcome you back to the LearnVC newsletter!, a platform that empowers African creators and helps them succeed by bridging the information and resource gap between them and the venture ecosystem.
Understanding and managing equity can be confusing, but as a founder, it’s essential to take the time to learn equity basics.
Equity seems to be one of the few factors that make or mar your startup.
You might ask, why do I need to learn equity and get it right🤷♂️?
Getting equity right ensures:
Your employees are motivated to do their best work and stick around
You get the best possible investors and term sheets
You as a founder retain a meaningful portion of what you’re building
You avoid legal trouble.
There have been a lot of sad stories of startups that failed at getting equity right at the earlier stage, although there’s no template on how to allocate equity to stakeholders, in most cases empathy and common sense always make you thrive.
There are two types of startup equity—preferred stock and common stock.
Preferred stock is mainly issued to investors, who pay a higher price per share of ownership. In return, these shareholders have a greater claim to a company’s assets and are paid out first in a liquidity event.
Founders don't get preferred stock. But it's nearly impossible to raise venture capital without issuing preferred stock, or preferred shares. In most cases, VCs today won’t hand over a dime in exchange for common shares, the form of equity extended to founders and employees.
Preferred stock is exactly what the name implies. Its owners receive preferential treatment over other investors in specific situations.
Common stock is the most basic form of stock and is mainly issued to founders and employees. Equity compensation for startup employees is usually issued from a pool of Common Stock.
So basically; Startup investors typically hold Preferred Stock/Equity, whereas founders generally hold Common Stock/Equity. Employees often hold options that grant them the right to purchase shares of Common Stock/Equity, subject to vesting schedules.
A vesting schedule is an incentive program established by an employer to give employees the right to certain asset classes(typically equity which has to be vested).
So yeah, that should be it for today, I’m still trying my best to recover and hit the road running again, in the meantime I’ll still keep on publishing content and do it consistently.
Hey! When's the next post coming?