How to Use a Startup Equity Calculator by Founders?

Equity distribution is undoubtedly one of the most important choices that startup founders make. Co-founders, employees, and investors achieve fairness within their positions. This acts as an important aspect and ensures that the company’s future growth is not compromised. However, this can pit the stakeholders against each other, bringing in some inconveniences without improving fairness. A startup equity calculator can provide solutions to such elicited notions, placing the founders in a more equitable position about the distribution of equity. In this blog, we will give you guidelines on how to effectively use a startup equity calculator.

1. Gather the Necessary Information

Before introducing the startup equity calculator, make sure that all necessary information is with you. This includes:

• Founder Contributions: Money spent, time used, intellectual property offered, and any investment made by each of the founders.

• Employee Roles and Contributions: Brief descriptions of the positions, experience, and contribution expectations of the key employees.

• Company Valuation: In case you are seeking to obtain capital, estimate looking out for the valuation of your company.

• Vesting Schedules: Information about their vesting and cliff periods, if any, when the equity will be distributed to the specified persons.

Having this information ready ensures accuracy when entering data into the equity calculator.

2. Choosing the Most Appropriate Equity Calculator 

The different range of available equity calculators comes with its own benefits and disadvantages. Some of the main options include: 

• Co-Founder Equity split calculator: This would be good in cases where co-founders wish to discuss equity distribution based on their efforts or contributions within the startup. 

• Gust Equity split calculator: This is a simple online calculator that takes into consideration several variables such as roles, risks, and contributions. 
• Slicing Pie Calculator: This is a dynamic equity calculator that will determine the split based on the real-time contributions as they occur. 

Select a calculator that best suits your startup’s stage and specific needs. 

3. Enter the Contributions of the Founders 

The first task one usually comes across in the equity calculator is entering the percentage contribution of each founder. This includes: 

• Capital Investment: This is the cash contribution made by each founder. 

• Time Commitment: This is the number of hours or the percentage of the time a founder has actually worked for the startup. 

• Skills and Expertise: These are the individual skills or expertise that each founder has. 

• Intellectual Property: Contributions include everything from patents and trademarks to proprietary technologies developed by a founder. 

Do not lie or exaggerate in this step as it is the most basic feature and foundation of equity split.

4. Enter Employee and Advisor Details

Next, input details about any employees or advisors who will receive equity. This may include: 

• Job Role: Employees with their specific job titles (for eg., C.E.O., C.T.O.) and their intended contributions. 

• Experience Level: Seniority and experience, if any, which may affect the equity offered.

• Advisory Contributions: For those working in an advisory capacity, consider their standing within the industry, their network, or the time they can commit.

This step helps ensure that non-founder contributors are compensated with equity fairly.

5. Adjust for vesting schedules

Vesting schedules are a common feature in almost all startup equity agreements. It ensures founders and employees earn equity over a time frame. Most calculators allow you to input: 

• Vesting Period: Usually about 3-4 years. 

• Cliff Period: A waiting period before any shares are vested. This is usually about a year. 

• Acceleration Clauses: Provisions for the sales and other important milestones of the company that could lead to acceleration of the common shares vesting.

These are details that determine how and when equity should be distributed.

6. Review Scenario Analysis

Numerous equity calculators incorporate scenario analysis, enabling one to determine the impact of various situations on equity distribution. For instance:

• Bringing in a New Co-Founder: What will be the effect of this on the present founders’ equity?

• Raising a New Funding Round: How much equity will the new investors hold? How will this affect the existing shareholders’ proportion?

• Hiring Key Employees: What will be the impact of compensation in the form of equity to the new employees on the overall equity?

Conduct scenario analyses to anticipate changes in future events and ensure a balanced and fair equity split.

7. Analyze the Results

The simulator gives a recommendation on how the equity should be split among shareholders once all details have been entered. We should thoroughly evaluate these conclusions in terms of:

• Fairness: Are the valuations made reasonable regarding what each has contributed and or risks taken?

• Sustainability: Is this split going to be viable in the future with the expansion of the business and the entry of new stakeholders?

• Control: Is the equity split structured in a way that enables adequate control of the business by the founders?

We can change the input values or examine another scenario if necessary, to come up with better results.

8. Consult the Legal and Financial Specialists

Despite the fact that a calculator to determine the equity distribution in a startup calls for the indispensable use of persuasive elements to promote the business, it cannot replace professional guidance. Before making any binding decisions on equity sharing, consult with:

• Legal Advisors – To guarantee that any equity distribution is clearly documented and is non-debatable by ensuring compliance with the laws.

• Financial Advisors – To evaluate the startup equity tax and other economic effects of the equity allocation.

Such consultations serve to prevent any possible legal or financial issues.

9. Make the Agreement to Allocate Equity Proportions Sale and sign the document

After you are very ready with the equity division and have obtained advice from your advisors, the next step is to recognize them and record the resolution made. This entails:

• Preparation of Equity Amendment: This is a legal document or paper that states the details on how the equities shall be shared among the shareholders including when the researcher’s company equity will be fully concentrated should be agreed on before taking any investment.

• Preparing Amendments on Cap Table: You should revise the cap table to reflect the changed equity structure and record the percentage shareholding in your organization accordingly.

• Stakeholders communication: Make certain that all stakeholders are made aware of the conditions under which equity is distributed and their repercussions.

Correct documentation and clarification minimize the chances and risks of ambiguity and conflicts in the future.

Conclusion

It remains true that a startup equity calculator is useful in taking one step toward the fairness and transparency of equity distribution in the startup company. In doing so, the founders will make rational decisions that guarantee the achievement of the set goals, and preserve healthy relations among the stakeholders. However, while the calculator gives you a framework, it is better to seek assistance before finalizing the plans, especially for the future of your startup.

If you need to check how many shares each co-founder in your startup should get based on proven industry standards, use our startup equity calculator. Try Now!