Definition and importance of shareholding structure

The shareholding structure is the basis of corporate governance, covering the type, proportion and related rights and obligations of shareholders, which directly affects the distribution of control and decision-making power of the company. It clarifies the identity of shareholders, distinguishes between common shares, preferred shares and other types of shares, and stipulates the proportion of shares, voting rights and distribution of benefits.

The shareholding structure also includes an equity incentive plan, which involves the distribution of control, the shareholder exit mechanism, and related legal documents, providing a clear framework for the company's future financing.

Proper equity design is crucial because it directly affects the company's control, benefit distribution, and long-term development. A scientific and reasonable shareholding structure can ensure that the founders and management maintain control of the company and avoid external interference affecting the company's strategic decisions. At the same time, the equity incentive plan can bind the interests of the core team with the interests of the company, and motivate employees to promote the company's sustainable growth.

In addition, a good equity design can help attract investors, lay a solid foundation for the company's financing activities at different stages of development, promote the company's steady expansion and enhance market competitiveness.

01 When do I need to carry out equity design?

Equity design is a key link in the development process of an enterprise, and the following situations are particularly necessary for equity structure design:

Start-up stage: When a business is first established, founders need to determine the equity ratio and set aside equity shares for future employees and investors.
Before bringing in external investors: Before an angel, seed, or other early-stage financing, you need to design your shareholding structure to attract investors and clarify their equity.
As your team expands: As your business grows and attracts key talent, you can retain them through equity incentive plans.
Major strategic transformation or business adjustment: When a company undergoes a major strategic change or business model change, it may need to re-evaluate and adjust its shareholding structure.
Pre-IPO preparation: Before a company prepares for an IPO, an optimization of the shareholding structure can help meet listing requirements and attract public investors.
In the event of a merger or amalgamation: Equity reallocation and design are particularly important when undertaking a merger or consolidation.
In the event of significant capital changes: the shareholding structure needs to be adjusted in the event of a new round of financing, equity transfer or shareholder withdrawal.
When legal or regulatory requirements change: When changes in laws and regulations affect the shareholding structure and governance, the equity design needs to be adjusted accordingly.
When resolving internal conflicts: When there is a dispute over equity distribution within the enterprise, the equity design can balance the interests of all parties.
When implementing a long-term incentive plan: In order to motivate employees for their long-term contributions, it may be necessary to design a long-term equity incentive plan.

Equity design is a dynamic process that may need to be constantly adjusted and optimized as the business grows and the external environment changes.

02 Characteristics of the angel round equity structure

The equity structure design of the angel round financing stage has its own uniqueness, which is mainly reflected in the following aspects:

Protection of control of the founding team: Angel rounds are the earliest stages of a company's development, when the company usually has only a preliminary product prototype or business model that has not yet been validated in the market. At the heart of the shareholding structure design is to ensure that the founding team can maintain control of the company and avoid too much interference by external investors in the company's decision-making.
Motivate and attract talent: The angel round equity structure should reserve a pool of options for future employees to attract and motivate core team members and ensure that they are closely tied to the interests of the company.
Reserve space for future financing: Angel round financing needs to reserve equity space for future development to ensure that the equity of the founding team will not be overly diluted in the subsequent financing stage.

Compared with Series A and subsequent financings, the design of the angel round equity structure pays more attention to the control protection of the founding team and the incentive of the early team, while the subsequent rounds consider more investor returns and the reasonableness of the company's valuation.

03 The focus of the angel round equity structure

When designing an angel round equity structure, companies need to focus on the following aspects:

Control protection: Ensure that the founders maintain control of the company, and it is recommended that the founders hold a larger percentage of the shares in order to have decisive influence in the company's decision-making.
Equity distribution: Reasonably distribute the equity ratio of the founding team members, ensure that the team's contribution matches the equity distribution, and reserve the equity share of future key employees.
Equity incentives: Set up option pools (usually 10%-20%) to attract and motivate future core employees.
Investor Equity: Provide angel investors with preferential liquidation rights, anti-dilution clauses and other rights protection to attract investors and protect their interests.
Valuation reasonableness: Reasonable valuation of the company to avoid over- or under-valuation affecting financing or equity allocation.
Design of legal terms: Clarify legal provisions such as shareholders' rights, voting rights, dividend rights, and exit mechanisms.
Financing scale and equity dilution: Determine a reasonable financing scale to avoid excessive dilution of the founder's equity after financing.
Reserve space for future development: Leave enough space for future financing and development at the time of equity design.
Transparency and fairness: Ensure that the equity distribution process is transparent and fair, and avoid future disputes and contradictions.
Flexibility: Flexibility is maintained when designing the equity structure to accommodate the uncertainty of business development.
Professional Consulting: Consult with professional legal and financial advisors to ensure that the equity design complies with laws and regulations and meets the company's long-term development needs.

04 The content of the design of the equity structure of the angel round

The equity structure design of angel round financing should include the following:

Equity distribution of the founding team: Clarify the equity ratio of the founding team and reflect its contributions and responsibilities.
Option pool setting: Set up an option pool (10%-20% of the total share capital) for future employee incentive plans.
Angel Investor Equity Ratio: Determine the proportion of angel investors' shares based on the company's valuation and financing amount.
Vesting Schedule: Set a vesting schedule to ensure long-term commitment to the team.
Equity Category: Determine the different types of shares such as common shares, preferred shares, etc., and their interests.
Protective provisions: Provide angel investors with preferential liquidation rights, anti-dilution clauses, etc.
Board structure: Clarify the composition of the board of directors, including representatives of founders and investors.
Voting Rights Arrangement: Determine the voting rights of different equity classes, whether to adopt a weighted voting or dual-class share structure.
Restrictions on equity transfer: Set conditions and restrictions on equity transfer to protect the interests of the company and existing shareholders.
Anti-dilution provisions: Provide anti-dilution protection for investors to ensure that their equity is not diluted in subsequent financings.
Exit mechanism: Set up an exit mechanism, such as repurchase rights, co-sale rights, etc.
Legal documents: Prepare legal documents such as investment agreements, shareholders' agreements, and articles of association to clarify the rights and obligations of all parties.
Valuation and financing terms: Determine the company's valuation and financing terms to ensure that they are fair and reasonable.
Compliance checks: Ensure that the shareholding structure complies with local laws and regulations.
Communication and Transparency: Ensure open and transparent communication with shareholders and investors to avoid future disputes.

05 References

Here is a reference case of equity design for entrepreneurs:

06 Write at the end

Equity structure design is not only an important part of the company's strategic planning, but also the key to the long-term development of the company. As companies move from angel rounds of financing to higher-level financing, the equity structure needs to be continuously optimized to adapt to the new business environment and needs.

Founders and investors need to recognise that a flexible and forward-looking shareholding structure can help companies adapt to market changes and achieve long-term growth. It is designed to attract investors and protect the control of the founding team to ensure a balance of interests among shareholders.

As a company grows, the shareholding structure may need to be adjusted, such as updating the equity incentive plan to attract and retain key talent, or adjusting the board structure to accommodate corporate governance needs.