Omoruyi Edoigiawerie, Esq
It is often said that equity is the most dominant currency in the tech and start-up ecosystem and I tend to agree. Many start-up founders at one point in their growth trajectory had only their idea and the only means they had to scale and grow was the ability to give an unseen benefit in return for the funds they need to grow.
Equity provided an avenue for them to get a chance at success and for a good number of start-ups, it paid off.

*Start-up Equity
Start-up equity describes ownership of the start-up. It is expressed in the quantum of shares in the company. At inception, the founder(s) own everything, and they share based on an agreement internally between them. However, as the business shows potential and attracts the right attention, there will very likely be the need to exchange equity for funding and also to attract talent and build capacity.
At the early stage, which in ecosystem language we call “the seed stage”, founders need to give up a significant percentage of the equity to match the risk investors are taking to provide the funding they need for their start-up.
However, as the business grows and shows verifiable potential for growth and success, the company’s equity increases in value, and investors are either willing to invest more or accept smaller equity in exchange for their investment.

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A business relationship is however formed between the founders and the investors who invest their funds in the company for equity. These investors make returns proportionate to the percentage of equity they have in the start-up. Inversely, if the start-up fails, the investors lose their investment but they still go ahead to take the risk because owning a percentage of a successful start-up can be very profitable. Imagine owning a chunk of Flutterwave or Piggyvest at the early stages of growth and what that would mean today.

*Stock, Shares, and Equity: The difference
Many times, people interpret stock and share to mean the same thing, but they are not. A stock is a general term much like equity, used to describe an amount of ownership interest in a company. A share is the smallest denomination of a specific company’s stock, it is how a company’s stock is divided.
Stocks are also not specific, but shares are specific as each share represents a specific piece of ownership interest in a specific company’s stock. This difference matters because the two terms relate to each other in a way that helps investors understand the role each play.

Equity distribution among start-up employees
Talent and manpower are two twin elements that help oil the wheel of growth for start-ups. And it is often a big challenge for growing start-ups to raise the requisite funds to pay for manpower. This is where Equity distribution for employees comes to the rescue.
After founders divide the initial ownership among themselves and investors, they also use it to attract talent. Oftentimes, early-stage employees are taking on risk, and therefore need to be compensated for the risk and technical expertise or effort they put in to grow the start-up which the salary they are offered at the time is not commensurate. As a result of this sacrifice, start-up founders offer equity to these early-stage employees who are hopeful of adequate compensation when the company eventually exits through a buyout or when it goes public with an Initial Public Offering (IPO) – this is known as employee equity.

*Employee Equity
Employees at a start-up are true risk-takers. Employee equity is a form of noncash compensation that provides a share of the company’s ownership in return for the risk. Employers can offer it to an employee, a consultant, or anyone as performance shares, options, or restricted stocks. Employee equity can be a helpful means of attracting and retaining work talent, especially during the early stages of a business. In addition, employees receive a share of the company’s profit, which can encourage them to put in extra effort toward its success
Some pivotal issues arise and pose challenges for founders when they elect to give employee equity, these include the quantum of equity, the terms, and the value to be placed on it at the time.
To address the issues highlighted above, employee equity is usually accompanied by a vesting period and oftentimes makes up for a lower salary. The vesting period is the amount of time an employee must work for the company before they have a non-forfeitable right to their stock or asset. Many start-ups use the four-year benchmark with a one-year cliff — this means, no ownership percentage is granted until an employee has worked at least twelve months. By attaching vesting periods to the equity, a company can increase the longevity of its key pivotal employees and mitigate attrition.
I have often maintained that employee equity gives each employee a personal interest in the start-up and even more than a fixed salary, it incentivizes commitment and a greater motivation for improving personal performance.
The math is simple, If the employee can increase the success of the company, they can help increase its profits, and if their profit increases, they improve their stock.
Position, experience, and seniority play a big role in deciding the quantum of shares to offer the potential employee.  But it is important to point out that at a company’s earliest stage, the initial employees get more, and as the company grows and stabilizes this reduces significantly.

Conclusion
Before distributing the equity, founders need to do adequate research to decipher the Company’s worth, the industry standards of valuation, and how much investors invest in similar businesses. This is very important to prevent situations where founders undervalue or overvalue their start-ups which either way would be of adverse effect to them.
Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.