4 Ways to Structure your Startup to protect your share ownership

Don’t get taken advantage of by investors, add structure from the start

Startup — Business Meeting.

Many founders run into investors who simply take advantage of their naivete on the business side regarding stock allocation, ownership, and company structure. When it comes to building a company, there are many things to take into consideration if you plan on scaling it or raising funds in the future. By setting up your company properly with the necessary structure, you will save yourself time and aggravation from potential investors. This is a quick summary of ways to structure your startup to save headaches down the road.

1. Share (Stock) Allocation: Ensure you have a set number of stock for your startup. This could be 100, 1,000, 10,000, or 1,000,000 or more. This clarifies the company constitution and gives a snapshot of the company as a whole relative to ownership. It will also save you headaches down the road, especially if you are considering bringing on investors or raising capital down the road.
2. Two Classes of Shares (Stock): Stock in your company should be divided into two classes upfront. Common and Preferred / Senior Stock. The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. … Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders. Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the company’s assets.
3. Split your own stock 50/50 between Common and Preferred: By doing this, you are protecting yourself should you bring investors into your company down the road. This ensures while your investors may want preferred stock, you will also have both classes of stock, and protects you on the upside (and downside), especially relative to dilution. You also will enjoy some of the same rights as the investors coming on board.
4. Have an employment contract in place, with a stock vesting schedule from day 1: This is simple, it protects you and ensures none of your ownership and hard work can be wiped or reset because an investor is coming on board. It also establishes clear lines of authority, ownership, and tone during negotiations. Employment contracts also help solidify enforceable and legally recognized ownership should anyone question your position in your company relative to their investment and stock allocation.

While the above are high level summaries, there is more to setting up a startup and building a company. It’s a good start.

Cheers!

Alani Kuye

#startups #gigeconomy