Startup equity is typically split into two categories: common stock and preferred stock. Common stockholders are typically the co-founders, employees, and early investors of the company. They have voting rights and receive dividends, but their shares are not guaranteed in the event of a liquidation. Preferred stockholders are typically later-stage investors who have invested more money into the company. They have priority in receiving dividends and assets in the event of a liquidation, but they do not have voting rights.
The percentage of each type of stock held by each shareholder should be negotiated and documented in the company’s articles of incorporation. The shareholders’ agreement should also specify how the equity will be divided among the shareholders in the event that one of them dies or leaves the company.
There are three main types of equity: dilutive, non-dilutive, and convertible.
Dilutive equity is when the shares are diluted, meaning that the percentage of ownership held by each shareholder is reduced. This can happen when the company raises money by selling new shares, or when employees exercise their stock options.
Non-dilutive equity is when the shares are not diluted, meaning that the percentage of ownership held by each shareholder stays the same. This can happen when the company raises money through debt financing or by selling assets.
Convertible equity is when the shares can be converted into another type of security, such as a bond or a promissory note. This can happen when the company raises money through a convertible debt financing.
When thinking about equity in a startup, it is important to consider the type of equity that is best for the company and the shareholders. Each type of equity has its own benefits and drawbacks, so it is important to choose the one that is best for the company’s needs.