DIY equity. Fidelity Private Shares LLC can take the stress out of startup equity management. With automated file organization and alerts for missing items, don’t sweat the small stuff between fundraising rounds. Learn more.
The startup life isn’t for the faint of heart. We usually hear about founders turning their tiny garage companies into huge international successes. But what we don’t hear much about are the challenges they face in learning and managing crucial aspects of their business—like equity.
Even the most brilliant innovators find it challenging to manage equity while focusing on their ideas. It’s a tough balance to strike. That’s exactly why Fidelity Private Shares LLC can flutter in like a financial godmother to simplify things with just a wave of their magic equity-management platform.
But back to equity, which is often seen as a major perk in the startup world. What exactly is it? Let’s find out.
Eek! Understanding equity
Of course you know what equity is. But for anyone who could use a refresher, here’s the short version: Equity is a portion of the company that shareholders own. Shareholders include founders, investors, employees, consultants, advisors—you name it.
Think about equity like owning vs. renting. An apartment you rent isn’t yours. Nothing that happens after you leave is your problem. Equity is like owning a singular room in the apartment, such as the kitchen. Once it’s yours, maybe it’s time to stop shoving all your leftovers down the disposal. You put more time into a kitchen you own, make it nice, and hope that one day, you can even sell that souped-up kitchen for more than you paid for it.
The same goes for a business. You own part of it, so you want to see it made real nice. Then one day, you can sell off that equity for a major profit if the company thrives.
Let’s break down the different types of equity:
- Incentive stock option (ISO): This is a stock option available only to US employees. It allows them to purchase company stock at a predetermined price. It’s a popular way to reward employees, offer potential tax benefits, and align employee interests with the success of the business.
- Non-qualified stock option (NSO): Companies can grant these to employees, contractors, or board members, who can buy them at a fixed strike price. They’re easier to give out but lack tax benefits.
- Restricted stock award (RSA): RSAs grants an employee ownership of common stock but only on a certain vesting schedule. They’re typically for founders and early employees of private companies upon signing an employment agreement. They can be sold or transferred only after vesting over a certain period. With minimal up-front tax implications, these can incentivize early employees to stick around.
Let’s stop here to pat everyone on the back for becoming equity experts. Great work all around, gang. Now, how do you manage it?
Create a cap table (no cap)
Look! Youthspeak in a financial article to keep it fun and hip. How do you do, fellow shareholders? With all these types of equity going around to all these different people, keeping a handle on who owns what is imperative. That’s why it’s critical for founders to create and manage a capitalization table.
The cap table is a handy breakdown of a company’s ownership structure. It keeps tabs on which founders, employees, shareholders, and so forth own what percentage of the company. Think of it as a living document that evolves with each fundraising round, employee stock grant, or equity transaction. It’s a critical decision-making tool, especially when planning for equity delusion or future fundraising tools.
Some basic elements of a cap table include:
- equity ownership
- convertible instruments
- option pool
- valuable information
- transaction histories
It’s very easy to mess up a cap table. If the information is fragmented and inconsistent, that’s bad. If you don’t manage it every day and things slip through the cracks without documentation, that’s brutal. Failing to model how new fundraising rounds affect ownership percentages? Don’t get us started. That’s why having the right tool to manage your cap table is so important.
Again, Fidelity Private Shares LLC is really coming in clutch here. Their data room automatically organizes your files and alerts you if any documents are missing. Plus, it updates the cap table whenever you add new information, such as hiring a new employee.
Go to your (data) room
The data room is another key component for fundraising. This centralized repository of all relevant company documents is ready to share with potential investors during the due diligence process. It’s a good way to show investors you’re transparent, prepared, and ready to roll.
A data room typically includes:
- legal and incorporated documents
- cap table and equity agreements
- financial statements and protections
- key contracts
- intellectual property documentation
- employee agreements
With all those docs swirling around, it sure would be nice if someone went and automated it for you. You know where this is going—Fidelity Private Shares LLC did automate it for you. Get the same handy data-room automation as your cap table when you work with Fidelity.
We get by with a little help from Fidelity
Simplifying equity management is no easy feat. Understanding it can feel just as overwhelming. There are so many components, documents, and people to keep track of. Doing it alone just sounds like a nightmare.
Fidelity Private Share’s experienced customer support team can help ward off the anxiety boogeyman. It comes included when you use Fidelity Private Shares LLC, along with all those automation features we already mentioned. They can help you steer clear of costly mistakes or just provide a little reassurance that you actually have everything you need.
So whether you’re still working out of the garage, a coworking space, or your first office (milestone much?), Fidelity Private Shares LLC provides cap-table management and other administrative services to private companies and their equity compensation plans.