All seed investors or business persons need to purchase equity shares to secure their investments and gain ownership of stocks while investing. Thus, it is crucial for start-up owners to have a clear idea of what equity management means to their company.
What is equity?
Equity is the ownership and power of a person in an organization. Equity management and its proper use are crucial for keeping yourself from diluting o a great extent. In other words, equity is the ownership interest, and one of its expressions is stock.
However, not only as stocks but equity can also be held in any other asset. Thus, it’s important to understand the classifications of equity shares and what is needed to start a business or even to increase funds.
In common use, start-ups need to organize their stocks into two classes, which are preferred stock and common stock. Equity management is crucial in the process of cap table management for start-ups.
For investors, equity is the value that is tangible and depends on the ability of investment of an organization. In many cases, most start-ups do not have enough data or information for the valuations of their organizations. While investing, when the firms put a specific value on the start-up, it becomes its valuation.
What are preferred and common shares?
Preferred shares are issued to the investors who arrive later, and common shares are depicted as the basic or common ownership of the organization. So, it can be said that common stocks are the simplest forms of equity or equity management.
Preferred stocks are offered to investors in order to reduce the risk that comes from their preferences regarding higher liquidation. The owners of preferred stocks can have a claim on the assets of the organization, along with some other special rights.
Voting rights are important in obtaining common stocks. Each common stock is able to offer one voting right to the shareholders. In case of an organization liquidates, the holders of the common stocks can get their money only after the clearance of the preferred stocks and other debts of the organization.
How can start-ups leverage equity management?
At the beginning of managing a start-up, the founders use brand equity management or cap table management for start-ups to gain resources. Equity can be needed for attracting talents, getting strategic partnerships, and also raising funds.
1. Attracting talents
Distributing equities among employees can be done by several programs that are equity-linked, such as RSU, ESOP etc. thus, employees who join early can be rewarded with more equity because they can take more risks while playing a crucial role in the development of the foundation of the start-up.
Hiring the right kind of talent is crucial for the expected growth of the start-up. Moreover, it also helps in motivating, attracting, and retaining talented employees.
In the beginning, when you are short on money, you may develop an ESOP pool and offer your employees an ESOP to compensate for their lower salaries. Stocks are an amazing way to reward your talented employees and also make them more interested in your organization.
2. Raising fund
Another way of equity management is to raise the funds of your organization by offering a particular part of the ownership to your investors. In this case, you may offer them preferred stocks in exchange for their investments.
Thus, you can get enough money to complete the necessary tasks like developing products, hiring talents, etc.
Therefore, accurate equity management and equity in management are essential for the success of your start-ups.