While the majority of your focus should be spent strengthening the overall growth and development of your company, as a business leader, it is your responsibility to also tend to the various opportunities that you can leverage with your equity. Equity, by definition, is the difference between the value of the assets/interest and the cost of the liabilities of something owned. While you want to keep a relatively comfortable number to hold you off for next year’s expenses, you also want to be strategic about how you can best used those funds to better grow your business. This becomes especially important when your startup begins to mature.
To take advantage of your financial funds, start off by understanding the numbers holistically. For many startups, they tend to utilize all of their equity to help scale their businesses within the first few months. Unless there is both a high demand and growing trend for your product and services, I would advise you to scale your business slowly. The reason why you should slowly scale your business is that many startups have a honeymoon period where they see a large amount of demand because of its overall novelty. As much as you want to scale your business to keep up with demands, you want to view the numbers afterwards and see when the demands take a dip. That point will be the first test in the success of your company. If your business was able to overcome that hurdle, I congratulate you! Make sure you track those numbers (revenue and expense) and see how they compare to the month beforehand. Continuously review these numbers until the end of each annual quarter. This will allow you to strategically understand what you can and cannot do with any additional financial funding coming your way.
Once you are able to understand the numbers, begin thinking like an investor. When building a startup, you have to have multiple perspectives when building your business. In order to acquire more additional funding, you are most likely going to have to give away equity of your company. Many investors only want to invest in companies that they believe are successful. To do this, you have to ask yourself some overarching questions like: Is your business poised for future growth? What is the next idea or strategic plan needed to improve for next year? Is there an exit strategy that will allow your investors to make a profit on their investment? What were some flaws that you can improve on financially next year? If you find yourself unable to answer these questions, hold off from any big financial investments. If, however, you are able to answer these with detail, you should immediately change your focus in allocating your equity in order to implement your business plans into action.
Now, as a startup, it is to your best interest to break the company up in specific ownership. This is what we call founder share. Founder share or founder’s stock refers to the equity interest that is issued to founders at or near the time in which a company was formed. This is especially important for any extreme situations (such as new ownership). For this to be effective, make sure you avoid any even splits. An even equity split among co-founders is rarely the best or fairest idea for each person. In reality, each founder brings some type of value to the table. It would not be fair to assume that everyone plays an ‘equal’ role within the business, especially with the CEO. Last but not least, make sure you are able to track the equity and shares of all co-owners, co-founders, and investors. While it is great to get a large number of interests from business titans who want to invest in your idea, you want to make sure you are being fair to your own investors who funded your already given success.