Today I had independent conversations with two founders about founder equity versus investor equity. Founders usually set up only one company, so they often need to rely on other people’s advice. A few things I shared with these two founders:
- Common shares – Common shares are usually issued to founding team members who actively work in the business—ideally full-time if the business can pay salaries. It’s a good practice (and a requirement of many investors) that common shares issued to founders be on a vesting schedule.
- Preferred shares – Preferred shares are usually issued to an individual or organization that injects capital into the company but doesn’t actively work in the business. Preferred shares have a stronger claim to company assets than common shares do. Preferred shares issued to investors are usually not on a vesting schedule.
- Cap table – A cap table details who owns what amount and what type of shares, how much capital investors put into the company, and other details regarding capitalization of the company. Many founders do this in a spreadsheet because it seems easy enough, but small mistakes can be extremely costly down the road. Using—as early as possible—software like Carta or LTSE Equity (formerly known as Captable.io) is highly recommended.
Every company and investment has its own nuances and circumstances, so the info above isn’t set in stone. It’s just a high-level starting place for founders. Company equity and cap tables are important and something founders should pay close attention to. It’s worth spending the time to do research or ask others if you don’t understand something related to these topics.