Equity for European Startups is a paramount concern for burgeoning businesses across the continent. As startups strive to secure their footing in a competitive market, legal frameworks and advisory services become essential elements for fostering growth and ensuring long-term success. At the forefront of providing comprehensive legal support stands Spotlegal.io, led by esteemed attorney at law Olivia Marcu Iordanescu. With a keen understanding of the challenges faced by startups in the European landscape, Spotlegal.io is dedicated to offering tailored legal solutions that empower startups to navigate the complexities of equity and corporate law. Through their expertise and commitment to excellence, Spotlegal.io serves as a reliable partner for startups aiming to establish a solid foundation and achieve sustainable growth in the dynamic European business environment.
What is “equity”?
As a founder, your equity is your gold. It is your most important currency, and like any currency or title, its value fluctuates.
Equity is a monetary value given to the title or interest in the company at a certain moment in time.
It is therefore an asset, but it is not a tangible asset, and, like any asset, it has a fluctuating value.
In this respect, in order to identify equity and evaluate it at any given moment in time, you would have to do so against an occurring event or trigger. This can be:
- A liquidation of the company or its assets: in this case, equity represents the amount of money that would be returned to the company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation.
- A transaction with shares in the company
- A transaction with assets in the company
Why is “equity” important?
Equity value is important for founders and shareholders because:
- It is the way in which they control the business (through their shares)
- It is the payoff they get for all the hard work, risk, and uncertainty they’ve taken in building their company.
- It incentivizes not only the entrepreneur but also its advisors or early employees, who will be accepting lower cash compensation to help build the startup.
- It is the main criterion for investment valuation.
Forms of equity
Equity typically takes one of two forms: shares or options.
A share is a registered ownership interest or title in a company.
Shares owned by the founder from the outset, when the company is incorporated, cost nothing, and owning a large chunk of shares ensures that the founder has control or a significant influence over the company.
Upon formation of the company, you will need to issue a minimum capital and number of shares, with a minimum nominal value, as per the requirements of mandatory company law provisions in the jurisdiction of your choice.
You can, and, in some instances, will have to, issue additional shares in your company.
- To raise money: there are good reasons to raise money by increasing the share capital and selling shares or instruments that are convertible into shares (e.g. convertible notes or SAFEs)
- An option holder exercises his or her options; you’ll have to issue shares.
- A key initial advisor or consultant requires equity as compensation.
- You want to incentivize your employees.
You will need a good stock option plan to ensure that there are a number of conditions to exercise, including the requirement to be bound by a shareholding agreement, which will deal with essential shareholders’ matters that go beyond the scope of mandatory law provisions and which reflect the private understanding of the share holders.
Characteristics of shares include:
- They grant the owner an interest in the company, including the right to receive dividends and liquidation proceeds.
- Payment of purchase price is required and due in full at time of purchase
- Carry the right to vote
- Do not vest
- Do not expire (unless the company expires)
Options are not an interest or title in the company but merely a right to acquire shares in the company at a specific moment in time.
Such option rights are granted to option holders via a separate option agreement, which needs to provide for a determined exercise (or strike) price, identify the underlying share in the company that can be acquired if the option is exercised, provide for the triggering events, i.e., the condition to the exercise of the option, and an exercise period (a deadline by which the option must be exercised).
Characteristics of options include:
- Payment of purchase price is deferred until the option is exercised (while the exercise price is fixed or determined at the time of the option grant)
- Do not grant ownership interest in the company (no right to dividends or liquidation proceeds)
- No voting rights on shareholder matters
- Subject to conditions being fulfilled before they can be exercised
- Expire after a period of time