Growth matters for early-stage businesses. Getting a product to market, generating initial traction, and then starting to scale is an exciting journey for every founder. But the avenue to long-term value involves a number of significant decisions about equity: the degree of ownership stakeholders have of a company.
Ultimately, what’s equity for? Many founders view equity as primarily a financial instrument. In particular, early-stage startups often chase funding with equity, with some founders dreaming of huge investment rounds involving venture capital. Global venture funding saw a meteoric rise in 2021, with investments totalling $643 billion, up more than 10x on what it was a decade earlier. This frothy market, with large early funding rounds and climbing valuations, influences founders’ goals and expectations. However, it’s important to remember that raising money does not always equal success.
Of course, raising capital is a crucial milestone for every early-stage business, as it opens the door to that next level of growth. Typically, growing companies have several rounds of funding, and at each round, you want to take just enough money to reach the speed where you can shift into the next gear. Companies can be undercapitalised and unable to hit the milestones they’d like, or overcapitalised, which is like trying to start your car in third gear.
Protect yourself
Yet access to capital is often so prized that founders can neglect to thoroughly risk assess this part of their journey. If you are giving up a percentage of your business, you’ll need to have an Agile Partnership or vesting agreement in place to protect yourself.
It stands to reason that if you hope your company will one day be extremely successful, then you should treat your equity with the respect it deserves. 10% now could be worth £10 million in the future.
What are the options?
Typically, founders have had limited options when attempting to access growth capital. They have been forced to turn to traditional debt finance, usually via a bank loan. Such processes can be time-consuming, and founders have to jump through endless hoops just to get someone to take a chance on them. Legacy banks regard most early-stage businesses as black holes of unsecured risk and require collateral as a result. In 2022, revenue-based finance provides an alternative to conventional, stress-inducing forms of capital.
The model is simple: many growing businesses generate predictable monthly revenue streams. Capital providers like Outfund can convert future revenue into up-front capital, which is then repaid via a flexible share of ongoing earnings. As a funding option, it’s faster, fairer, and more human; offers are generated within days, and there is no personal risk or compound interest. It’s rocket-fuel capital, designed to let founders scale on terms that make sense for their business. Through leveraging non-dilutive capital, you can supercharge your growth curve ahead of a raise, with the knock-on effect of extending your runway and protecting precious equity.
Using your equity wisely as a tool for growth
Rather than an instrument purely for raising external capital, equity can become an internal growth engine through employee share schemes. This gives founders a way of sharing company ownership with their team. In turn, employees gain the most upside of the business’ success.
If the history of a business lies in its founder and their idea, then its long-term future is its team and the level to which they buy into that vision. Fairness is the best foundation; it makes sense to motivate and incentivise the right people to stay with the company for the long haul and make it successful. Your employees are the people you go to war with. They’re in the trenches every day, investing their time and hard work into the company’s growth. Employee share schemes enable a direct reward for that input and a long-term alignment of incentives.
How best to manage your equity
Regardless of which route you take, you’ll need to find a simple and non-time consuming way to stay on top of your cap table.
Frankly, as shareholdings and teams grow and evolve, you don’t want to be constantly updating a spreadsheet. Attempting to do so will result in loss of control and an administrative headache for whoever’s eventually landed with the job of fixing the mess.
Manage your shareholdings easily with Vestd’s cap table management software. You’ll also be able to easily administer your share scheme if you choose to create one.
The software you choose can make or break the effectiveness of your share scheme when it comes to powering growth. With Vestd, all of your team members will be able to check the values of their shares in real-time and even calculate what their shares will be worth if the value of the company increases. It’s an incentiviser like no other!
Consider your options at an early stage
For many founders, equity pools are something for the future, because the present moment is all about keeping the train on the tracks until they’ve got the capital to start thinking bigger.
By considering everything carefully at an early stage, you’ll be fuelling your company for growth. And by using your equity wisely, you can ensure that every member of the crew enjoys the ride.