As a CEO who dreams of seeing your startup succeed, you know that it all starts with a solid foundation. And it's the ownership structure that is one of the most important building blocks of that foundation. But what should you focus on? Take a look at our 3 selected key points that can guide you and your startup towards the road to success.
In the start-up phase, patience is a virtue. Loans from the bank are impatient by nature, with interest rates and repayment requirements breathing down your neck. This can often be the wrong type of capital for the company before it starts making money. In addition, getting a bank loan in the early stages is often a challenge.
External investors, in the early stages, may have high expectations and be impatient. To the extent that external investors are involved, they should be familiar with the risks, be patient and have a long-term perspective. Entrepreneurs often contribute the initial capital themselves, and may have to borrow privately to achieve this. Public support schemes, such as Innovation Norway, the business department in your municipality or the Research Council of Norway (e.g. the SkatteFUNN scheme), can also be of help. Remember that some require matching capital from investors. Therefore, take this into account when creating a capital strategy.
Break down development into milestones and secure sufficient capital for the next phase
Be prepared for things to take longer than expected. If you promise to achieve something with the capital you ask for, it's foolish to ask for more money afterwards because you didn't have enough money to reach the goal. Don't underestimate your capital needs.
When you raise capital from investors, it will often involve a capital increase which in turn means that all shareholders are diluted. You want to minimize this dilution as much as practically possible. It may be a good idea to split capital needs into several tranches based on milestones that help increase the value of the company. Balance this with the need for peace of mind to develop the company and have sufficient capital for the next phase.
Regardless, all capital in a startup should be patient and avoid short-term external commitments.
A good ownership structure from the start can prevent you from complicating things in the next phase. Pricing the company is also important, both in terms of diluting existing owners and whether new owners will buy shares.
Motivated key people on the ownership side
Key people on the ownership side are worth their weight in gold. They are willing to work extra, even without a large market-based salary. So make sure the ownership structure gives key people the right incentives and motivation to contribute to the company's success. Different share incentive agreements may be appropriate for different phases of the company.
Ownership among key personnel ensures long-term commitment, which in turn ensures continuity for the company. Many investors want key employees to have share incentives in one form or another.
Avoid passive owners
Avoid passive owners in the early phases. If a previously active owner has become passive (so-called "dead equity"), it can demotivate others who are working extra to create value. In such a situation, the passive owner can become a "free rider". A "broken cap table" with passive owners can create challenges if you are dependent on owners contributing value creation in a development phase.
Think about when and who you bring in external owners
Are you considering external owners (investors)? Then you should be wary of entering into complex agreements that could create problems for you later on. Building trust takes time, so make sure investors are patient and realistic in their expectations. Angel investors, also known as business angels, can be a good first choice. They bring with them knowledge and expertise, and often base their investments on an early stage. Who you get on board as external owners can make a big difference, so check references before inviting them to join your company. This can ensure that they are the right owners for your future journey, contributing capital, expertise and/or networks according to your company's needs.
Consider whether you prefer financial or industrial owners. Some open up opportunities for product development or distribution. At the same time, an industrial owner can limit strategic choices at an early stage. An increased number of owners requires more administration, which is why effective ownership management systems are particularly important.
If you are raising capital in several rounds, it may be a good idea to introduce someone with financial capacity early on. Alternatively, involve investors with networks that can provide further support in subsequent phases.
Shareholders' agreements
Shareholders' agreements are the key to predictability, especially in companies that do not have very many shareholders. These agreements between the shareholders of a company are a supplement to the articles of association and any other share rights between different parties. The shareholders' agreement can prevent difficult conflicts that may arise.
You should always strive to get all shareholders to adhere to the shareholders' agreement. This is achieved by approving it upon creation or through a Deed of Adherence when they buy shares later.
Employee agreements - restricted shares or options?
Carefully consider valuation, risk, cost and tax to determine the most favorable type of share incentive agreement at different points in time. Your goals and the room for maneuver within the law are important factors. "Restricted stock awards may be more suitable at the start, while options may be more favorable in later phases.
Think about what happens if one of the key people (shareholders) leaves. Shareholder agreements or a Restricted Stock Award (RSA) will be crucial to ensure ownership remains in the right hands. https://www.unlisted.ai/blogg/hva-er-restricted-stock-awards-rsa
Issue by traditional share issue or other financial instruments?
Be careful about entering into agreements you do not fully understand. In traditional share issues, you may be tempted to accept a term sheet from a professional investor. It is tempting to receive money, but make sure that the terms and conditions match your wishes. If you do not opt for an ordinary share issue, financing via convertible instruments may be an option. These may have different mechanisms related to future ownership structure. Familiarize yourself thoroughly with the conditions associated with this and what the future consequences may be before you enter into an agreement.
Valuation of start-up companies is challenging, and some choose to postpone this by entering into so-called "SLIP agreements" (Startup Lead Investment Paper) with investors. This provides the opportunity to secure access to capital, with the least possible administration, and to postpone pricing, which is often difficult at an early stage.
The start-up adventure requires careful consideration and strategic thinking about ownership structure. From patient capital, choosing the right people at the right time, and good agreements, ownership structure plays a crucial role. If you consider these points and reflect on how they will affect your startup, you can avoid unnecessary complications later on. A well-thought-out ownership structure can be key to your startup's success, so this is a decision well worth noting.
