Equity is a kind of ownership generated based on investment. The final equity proportion is determined based on the currency, material objects and relevant rights of investment, and the overall consideration of factors such as capital contribution, shareholders' respective advantages and role status in the enterprise. Different equity structures determine different structures of enterprises, thus determine different corporate governance structures, and ultimately determine the behavior and performance of enterprises.
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The role of equity structure design
The role of equity structure design is to clarify the rights, responsibilities and interests of partners, help the start-up companies develop stably and facilitate the financing of start-up companies. In addition, equity structure is not only a major factor affecting the control right of the company, but also a necessary condition for enterprises to enter the capital market. Therefore, the equity structure of entrepreneurial enterprises reflects various resources needed for the survival and development of entrepreneurial enterprises, such as team, technology, capital, channels, etc. Thus, the design of equity structure is to consider how to find the resources needed for the development of the enterprise, and make reasonable use of these resources to achieve a win-win situation between the enterprise and all stakeholders.
The core of equity structure design
1. From the perspective of founders, the essence of the founder's appeal is to control the development direction of the company. Therefore, the founder's control must be taken into account when designing the equity structure in the early stage, which is a relatively large equity (generally recommended to be 2-4 times of the average shareholding ratio of partners).
2. From the perspective of partnership, as followers of the founder, partners/co-founders must have highly consistent values based on the partnership concept. As one of the owners of the company, partners hope to have certain participation rights and discourse power in the company. So, early on, you have to take some equity and split it equally (this equity is basically 8-15%).
3. From the perspective of core employees, their appeal is the right of bonus. Core employees play a crucial role in the rapid development stage of the company, and this part of equity should be reserved in the early stage of equity structure design. When the company in the rapid development stage, it can be really useful (after the initial allocation, it is usually recommended dilution reserved the same proportion 10%-25%)
4. From the perspective of investors, they pursue the high net worth return, their demands for high quality project is to enter and exit quickly, so to a certain extent, investors require liquidation preference rights and the pre-emption rights is very reasonable, founding team in the face of these demands, to some extent, still need to understand.
Conditions of the company's equity structure design
1. On the first day of starting a partnership, partners will face the problem of equity structure design (partner equity design);
2. If the company wants to introduce angel fund in the early stage, it will face the problem of equity structure design (angel financing);
3. There are 30 to 50 employees in the company, if we want to motivate middle management,important technical personnel and the company to go on for a long-term, we will face the problem of equity structure design (employee equity incentive);
4. The company needs to recruit, accelerate development and introduce round A, round B and round C investors...IPO, it will face the problem of equity structure design (venture equity financing);
5. The company is good enough to achieve the size of BAT, it needs to reduce large companies to small size and transform old enterprises into new ones, which will also face the problem of equity structure design (incubator and amoeba management).
The importance of equity allocations
If the problem of equity allocation is not handled well at the very beginning, it is likely to bury hidden dangers for the failure of the future venture. In the start-up "honeymoon period"，shareholders may not have too much dispute, it is the so called easy to share the pain, difficult to share the sweet. Especially when the business has reached a certain stage and is basically on the right track, disagreements are most likely to occur. If no one in the entrepreneurial team has absolute control and no one is convinced, the final result may be parting ways, leading to the failure of the business.
1. Define the rights, responsibilities and benefits of the partners
It is true that partnerships pay attention to feelings, but ultimately, it needs to realize practical interests. How to reflect your interests and value? A very important point is equity, stock ratio. The latter is an important reflection of your role and interest in the project.
2. It helps the stability of startups
At startup, maybe we are classmates, brothers, close friends, so the stock ratio is regardless, do things first, and get them done. Of course this causes problem, because at the beginning, no one can have a good communication since the good relationship, and things get worse when there is a problem. The end result is that the start-up project is affected.
3. Affect the control right of the company
It can be seen from the case at the beginning, everything is caused by control right. If their stock ratio can form a core control right, the dispute can be completely avoided.
4. Convenient financing
Now when investors talk to you about investment, they will pay attention to your products, pay attention to your feelings, pay attention to your progress, and also pay attention to whether your equity structure is reasonable. If they see a poor equity structure, they will definitely not invest.
5. Necessary conditions for entering the capital market
I believe that every entrepreneur's venture project has the goal of IPO, as long as the project is IPO, the capital market must require your equity structure to be clear and reasonable.
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