Equity in Startups: Mistakes to Avoid Before You Scale
Equity in startups can be a blessing or a curse. While it’s a powerful tool for attracting talent, securing
Equity in startups can be a blessing or a curse. While it’s a powerful tool for attracting talent, securing investment, and incentivising growth, mishandling it can lead to internal conflict, legal disputes, and lost opportunities. Understanding how to manage equity early is crucial if you plan to scale successfully.
The Most Common Mistakes With Equity in Startups
Startups often move fast, and in the rush to get things done, equity decisions can be made on the fly. This leads to avoidable errors like:
1. Giving away too much too early
Founders often overcompensate early hires or advisors with large equity stakes. Without clear milestones or vesting terms, this generosity can backfire—especially if those stakeholders exit early but keep their shares.
2. No vesting schedule
One of the worst equity mistakes is failing to implement a standard four-year vesting schedule with a one-year cliff. Without it, someone who leaves after a few months might walk away with equity they didn’t fully earn.
3. Failing to document properly
Handshake deals and informal promises are common in early-stage startups. But without legal documentation, disputes become more likely, especially once funding enters the picture.
4. Ignoring dilution
Many founders don’t fully grasp how future funding rounds dilute their ownership. If you give away 30% early on, you may end up with far less control than you expected by the time you reach Series B.
5. Not planning for future hires
Failing to set aside an employee option pool is another frequent equity in startups misstep. You’ll either struggle to recruit later or have to renegotiate terms with existing shareholders to make room.
How to Fix These Equity Mistakes Before Scaling
Correcting equity in startups isn’t just about legal fixes—it’s also about proactive planning. Here’s how to avoid major issues before they escalate:
Set clear vesting terms. Ensure every equity agreement includes a four-year vesting schedule with a one-year cliff. This protects the company and rewards long-term commitment.
Use proper legal documentation. Even if you’re working with friends, formalise everything. Use templates from trusted legal sources or invest in startup-specific legal counsel.
Educate yourself on dilution. Learn how different funding rounds impact your ownership. Tools like cap table simulators can help you visualise outcomes.
Create an equity plan. Allocate shares for future hires and set expectations with co-founders about how and when equity will be distributed.
Be transparent. Open communication about equity in startups can prevent resentment and reduce misalignment. Keep stakeholders updated as you scale.
When to Bring in an Expert
If your startup is gaining traction or attracting investment, it’s time to bring in a legal or financial expert. Cap table cleanup, founder restructuring, and option pool creation are complex tasks that require precision. Fixing equity in startups early is easier (and cheaper) than trying to untangle it during due diligence.
Equity in Startups: A Strategic Tool, Not Just a Perk
Equity isn’t just compensation—it’s a strategic asset that shapes your company’s future. Handled wisely, it aligns teams, attracts backers, and fuels sustainable growth. Handled poorly, it can block funding, fracture relationships, and cost you your company.
As you grow, equity in startups should evolve with your goals. That means reviewing agreements regularly, adapting to funding realities, and keeping a firm grip on your cap table.
