What is Equity?
The term “equity” refers to the ownership of a company. If you have equity in a company, you own a piece of the company. In a Delaware C-Corporation, this equity, or ownership, is represented by shares of stock.
The ownership of shares of a corporation determines who controls the company. Generally, the stockholders (the individuals who own shares of stock) determine who is on the company’s board of directors. The directors make certain important decisions for the company by vote at a meeting or by unanimous written agreement, and the directors also appoint the officers who run the day-to-day operations of the company. Note that when a corporation is first formed in Delaware – before any shares have been issued – the incorporator selects the initial directors.
Initially, startups formed on Symbola will only have one “class” of stock: Common Stock. Common stock is typically issued by startups to founders, advisors, and employees. As startups grow and raise venture capital, they may also issue preferred stock that carries additional rights.
How To Issue Equity to your Startup’s Founders
Founders incorporating on Symbola can issue equity to themselves and any cofounders using the Founder Shares Workflow. This workflow is included in Symbola’s free startup plan.
Through this workflow, startups can generate and sign Common Stock Purchase Agreements and Confidential Information and Invention Assignment Agreements that follow the best practices for startups who plan to raise venture capital.
Best Practices for Issuing Founder Shares
The default terms in Symbola’s documents are designed to work for most companies and follow the best practices for high-growth startups. These terms include:
A vesting schedule incentivizes founders to continue contributing to the company over time and allows the company to survive with fair, pre-defined terms in the event someone leaves. Symbola’s templates include a 4-year vesting schedule with a 1-year cliff for all founders. The default “vesting commencement date” is the date you incorporated your startup.
Under certain circumstances, a founder’s right to 100% of their shares may be “accelerated.” Symbola’s Common Stock Purchase Agreement provides for acceleration in the event that (1) the company is acquired and (2) the founder is then fired without cause. This is called “double-trigger” acceleration.
Confidential Information and Invention Assignment Agreement (“CIIAA”)
Symbola will generate a “CIIAA” for each founder to sign at the time of stock issuance. This agreement protects startups by ensuring that the company owns the right to intellectual property the founders create while working on the startup.
As part of their diligence when they are deciding whether or not to invest in your company, investors often want to see that these agreements exist. Experienced VCs understand that without these agreements, a company risks expensive lawsuits.
How a startup chooses to divide equity among its cofounders is a critical step in the company’s formation. It is important to openly and honestly discuss this decision with your cofounders, and there are many great resources available online to help shape and inform that conversation.
In order to issue equity, there must be authorized shares available for issuance. The number of authorized shares is set by the startup’s certificate of incorporation. Startups who incorporate using Symbola authorize 10,000,000 shares of common stock in their certificate of incorporation.
To plan for the future, startups typically don't issue all of these authorized shares upfront to the cofounders. Reserving some shares for future cofounders, employees, and investors can save startups future legal work and hassle. Once a corporation issues all of its authorized shares, the corporation must file an amended certificate of incorporation with the Delaware Secretary of State in order to increase the number of authorized shares.
If you incorporate with cofounders, Symbola’s default templates will help you divide 8,000,000 of the initially authorized 10,000,000 shares among the cofounders and reserve 2,000,000 shares for later use. Solo founders on Symbola can issue 5,000,000 shares of stock to themselves and reserve the other 5,000,000 shares for later use. Until the startup later issues these "reserved" shares, the 8,000,000 or 5,000,000 shares that are initially issued represent 100% of the ownership and control of the company.