According to the 2016 JPMorgan Chase Report, most small businesses only have enough cash flow to cover 27 days of expenses. The ideal is a cash flow that covers over three months of expenses.
Most startups struggle with financial planning due to a lack of information and experience.
Equity planning is not just a boost to your finances, but a necessity to combat contingencies and keep your business afloat at all times.
You should invest in long-term equity planning even if you’re an early-stage startup. We’ve put together a comprehensive guide to equity planning that boosts your company’s growth in the long term. Keep reading to learn more.
Pick What You Need Equity Planning For As A Startup
There’re many benefits to introducing equity planning in your business’ setup — no matter how big or small your company is.
In fact, instilling a solid foundation of equity planning in its earliest stage will reap you tremendous benefits are your business gets going.
However, you need to pick a clear objective and path for equity planning. Decide what it is that you need to introduce equity planning for. This can depend on a variety of aspects, namely:
A. The Phase Your Business Is In
Your need and use of equity planning varies based on where you are with your business.
A big corporation could use equity to branch out with its resources. A business in its inception stage might want equity planning to ensure liquidity.
The key is scaling your operations and equity planning accordingly.
We recommend using an online cap table management software for large enterprises to scale your equity operations accordingly and stay one step ahead of the curve with your finances.
B. Benefits Received By Your Governing Authority
Many companies dabble in equity planning to receive various benefits from local, state, national, and industry-based authorities.
These authorities promise benefits to encourage companies to indulge in equity planning and safeguard themselves against cash flow issues.
C. Future Financing And Investment
Another objective for companies to start equity panning is the ease it brings to future financing and investment opportunities.
When your finances are taken care of right from the beginning, you’re able to map out future operations better, identify opportunities, and avoid pitfalls.
Equity planning is a vast field. Whatever your goal is to indulge in it, you’re inevitably going to reap other benefits alongside it anyway.
The purpose of picking one goal is to streamline operations and not feel overwhelmed.
Make necessary arrangements and paperwork around that one goal. Take one step at a time to scale your business as you grow and expand your equity operations accordingly.
2. Plan It All Out
Once you’ve decided on a short-term goal for your equity planning, create an execution plan around that goal.
Regardless of what your goal and expectation is, here are a few key factors you should consider for comprehensive planning:
A. Take Stock Of What You Already Have
It’s often debated whether you should set a goal amount you wish to raise or take account of what you have first.
However, taking account of the stocks you already have gives you a firm idea of where you stand financially.
It can encourage you to aim higher or relieve you of the burden of raising a high capital as you can simply raise what is needed.
Organize your current financial assets and funding neatly.
B. Set A goal
Once you know where you stand, you can set realistic goals for the initial funding and equity setup you want.
This includes defining your value proposition and competitive advantage to your target market.
More importantly, express your funding needs in absolute monetary terms to be able to put every type of funding you receive together to create formidable equity for your startup.
C. Evaluate Your Options
There’re a plethora of options when it comes to building up equity for your firm, namely IPOs, loans, crowdfunding, grants, bootstrapping, venture capitalists, angel investors, and corporate partnerships.
Every option comes with its own advantages and disadvantages and will give you varying degrees of control of your equity as a whole. You need to pick the options that align with your goals and interests.
D. Put the plan into action
Once you’ve decided on the various options to execute for equity generation and management, it’s time to put them into action. There are two important aspects to remember here.
First, you should keep a budget aside to execute the options. Most options will include registration and execution fees on various steps.
Secondly, you should be on your feet at all times, ready to review and correct your strategies as you go.
Remember that your needs and motivation for equity change as your startup grows. It’s important to plan things accordingly by keeping the scope of expansion as a possibility.
It helps you avoid future mishaps and create a smooth flow of equity management.
3. Educate Yourself In Equity Planning
An important aspect entrepreneurs often forget when equity planning is to gain comprehensive knowledge of it.
The financing of your firm is of extreme importance and you simply cannot navigate through it with just outside help or delegating it to others.
Even if you get other people to do it, you still need to have a solid understanding of how your equity and finance work to be able to make informed decisions. This is because other people can only help and guide you. The final call is still yours.
There are many sources available today that can help you gain a sounder understanding of equity:
- Free internet databases
- Guides and courses
- Books and journals
- Asking your accountant or consultant
Pick whichever option suits you best and learn at your own pace. The goal should be to be aware of the basics of equity planning to chart the most suitable course for your startup.
Moreover, be on the lookout for current trends in the financial market so that you can spot opportunities to capitalize on as well as pitfalls to avoid.
4. Decide how to distribute equity
Ownership of your company’s equity is of paramount importance. Of course, as the owner, you’d want 100% ownership.
This approach is not a growth-heavy approach as distributing equity wisely lends immense growth potential.
Moreover, you’d want to reward the stakeholders as well as the employees of your company for their contribution to building it and its equity. Giving them a piece of your equity lets them know you appreciate their contribution.
While there are no set rules on which party gets how much stake, there have been a few trends regarding it as the company scales. They are as follows:
In the above table, you can see how the stakes of different patties change as a company moves from its inception (seed) to its most advanced stage (E+).
Once again, this is only the aggregate of the trend that has been observed. The equity distribution of every company depends on various factors such as:
- The stage your business is in (as depicted above)
- Owner’s preference
- Number of stakeholders involved
- Nature and scope of your business
- The industry you operate in
This is to say that if you wish to keep a larger stake in your business even as you scale, you can certainly do it.
The goal of equity distribution is to invite valuable contributions from your associates and employees to take your company forward.
5. Get Expert Help
As discussed above, having a good knowledge of your company’s equity is a must when equity planning.
However, this doesn’t mean you cannot get some outside help. There are many tools available in the market today that will help you plan your equity in the most optimized manner. Some of the most popular ones are:
- Accountants, chartered accountants, and consultants
- Software solutions and online platforms
- In-house financing team
Having outside help can help put things in perspective and can be especially helpful when your company expands.
When you scale, you will not be able to dedicate all your time and energy to equity planning, you will need to delegate it anyway.
It’s better to delegate it to people you trust and value the opinion of. Having trusted employees and consultants helps you navigate equity planning with valuable outside opinions.
We recommend that you record and organize all the equity planning you do with your team so that you can go over it whenever needed. It also helps with audit and compliance.
Plan Every Aspect Of Your Company’s Equity In Advance For Smooth Sailing In The Future
Equity planning is one of the most important aspects of running a business yet many entrepreneurs struggle with it, especially when the time comes to scale their business.
An effective solution to your equity woes is to plan every aspect of it in advance while leaving room for scaling in the future.
Decide what the distribution will be, what your immediate and long-term goal is, how you will achieve it, and what paths you wish to take for it.
Get expert help if you need it and be on the lookout for trends to tap opportunities.
Let us know in the comments what you think is the best way to plan equity as a budding entrepreneur.
Ella Marcotte
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