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What kind of equity should you offer?

I'd like to know for simple diligence what kind of equity is being offered to investors. I've read about "dilution proof" shares. Is that a gimmick? Otherwise, the general classification of shares is a who gets paid first, who has voting rights, who gets taxed one way or another, right? Any good links?

3 Replies

Nofyah Shem Tov
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Nofyah Shem Tov Entrepreneur
Founder BlogMyLunch
look at the job offers on Angel.co to get an idea...
Orion Willow Parrott
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Orion Willow Parrott Entrepreneur • Advisor
Founder and CEO, Lendsnap YC S16. We're hiring!
Founder's Dillemas is a great BOOK if you want the long answer.
Or Venture Deals by Brad Feld. There is a lot to cover to properly answer your question.

Dilution happens. It should happen to everyone but investors will try to protect themselves from it, and you shouldn't let them too much. There are many other relevant terms like liquidation preference ("who gets paid first") where they can preserve their return if the business goes sideways (moderate outcome).

The only classification of shares generally is common and preferred.Attributes of a venture deal may include the features you listed.

There is no such thing as founder's stock, legally speaking. It doesn't have more rights or rewards, it is just that common stock granted to founders. Voting rights are conferred to all holders of common stock. Preferred stock may have better voting rights. Preferred stock is reserved for investors (founders may become investors by participating in the round and receive preferred stock for their cash contributions).

Tax happens. Taxation occurs because shares must be paid for at fair market value. If they are not paid for, then there is a taxable event for the recipient. Exercising options can also cause taxation. The venture deal can't really specify who gets taxed how directly. Generally everyone is taxed the same. The tax rate is determined more by individual choices outside the deal, like when to exercise options or whether to purchase or gift stock.
Max Avroutski
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Max Avroutski Entrepreneur
eCommerce, Software Developer, Usability, Marketing & Product Creation consulting services.
Novice founders dream of "dilution proof" shares, but no one usually craze enough to actually handicap them-self by doing that. For most Investors it would make such company uninvestable.

For added ability to control your company Founders can use "dual class shares" - google it

Investors usually get Preferred shares, or if seed investors then best is Convertible Equity- which is special type of equity that gets converted to preferred shares at a trigger event, usually a valued round. But can allow to receive investment without need of expensive valuation which can cost as much as ~$50,000 and have many more good features.

Investors would usually demand that Founders get common shares with 4 years vesting and set aside 20% of shares for employees. But I know of few tricks to lower both.

When you file for a company you need to be careful not to distribute shares until you know what you are doing because as soon as you do receiver will have 30 days to file 83b with IRS to get favorable tax treatment.

But do read books or better google terms and read blogs and forum posts, there is a lot of misinformation, just pay attention who is writing and where, get citation and cross reference if in doubt.
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