As a CEO with dreams of seeing your startup succeed, you know it all starts with a solid foundation. And ownership structure is one of the most important building blocks of that foundation. So what should you focus on? Here are 3 selected key points that can guide you and your startup along the path to success.
What kind of capital - keep your capital patient 📑
In the startup phase, patience is a virtue. Bank loans are impatient by nature, with interest payments and repayment schedules breathing down your neck. That's often the wrong type of capital for a company that isn't yet making money. On top of that, getting a bank loan in the early stages is often a challenge anyway.
External investors at the early stages can come in with high expectations and limited patience. To the extent you do bring outside investors on board, make sure they understand the risk, are patient, and take a long-term view. Founders often put in the first capital themselves, and may even need to take out personal loans to make it happen. Public funding programs can also help, like Innovation Norway, your municipality's business department, or the Research Council of Norway (for example, the SkatteFUNN scheme). Keep in mind that some of these require matching capital from investors, so factor that into your capital strategy.
Break the development into milestones and secure enough capital for the next phase
Be prepared for things to take longer than you expect. If you've promised to achieve something with the capital you're asking for, it's bad form to come back asking for more money because you didn't have enough to hit the target. Don't underestimate how much capital you'll need.
When you raise capital from investors, it usually involves a share issuance, which means all existing shareholders get diluted. You want to minimize that dilution as much as you practically can. It can be smart to break your capital needs into multiple rounds tied to milestones that increase the company's value. Balance that against the team's need for breathing room to actually build the company, and make sure you've got enough runway to reach the next stage.
Either way, all capital in a startup should be patient capital, and you should avoid short-term external obligations.
What kind of owners 💼
A good ownership structure from the start prevents you from complicating things later. Pricing the company also matters, both for the dilution of existing owners and for whether new owners will actually buy in.
Motivated key people on the ownership side
Key people on the ownership side are worth their weight in gold. They're willing to put in extra effort, even without a big market-rate salary. So make sure the ownership structure gives your key people the right incentives and motivation to contribute to the company's success. Different share incentive arrangements make sense at different stages.
Ownership among key people creates the kind of long-term commitment that gives the company continuity. Many investors actively want to see key employees holding some form of equity incentive.
Avoid passive owners
Avoid passive owners in the early stages. If a previously active owner has become passive (the so-called "dead equity" problem), it can demotivate everyone else who's still putting in extra effort to create value. In that situation, the passive owner becomes a free rider. A "broken cap table" full of passive owners can become a serious headache if you're relying on owners to actually contribute during a development phase.
Think carefully about when and who you bring in as external owners
Considering external owners (investors)? Be careful about agreeing to complex terms that can come back to bite you later. Building trust takes time, so make sure investors are patient and realistic in their expectations. Angel investors can be a great first choice; they bring knowledge and experience, and they typically focus on early-stage investments. Who you bring on as external owners can matter a lot, so check references before inviting them onto the cap table. That helps make sure they're the right owners for the journey ahead, contributing capital, expertise, and/or networks based on what the company actually needs.
Think about whether you'd prefer financial or strategic (industrial) owners. Some open doors for product development or distribution. At the same time, a strategic owner in the early stages can box you in on strategic choices later. More owners also means more admin, so efficient ownership management systems matter all the more.
If you're planning to raise capital in multiple rounds, it can be smart to bring in someone with the financial capacity to keep contributing early. Alternatively, involve investors whose networks can support you through the later stages.
Which agreements - understand what you sign, and build predictability 🎯
Shareholders' agreements
A shareholders' agreement is the key to predictability, especially in companies that don't have a lot of shareholders. It sits alongside the company's articles of association and any other share-related rights between parties, and it can prevent a lot of the messy conflicts that can come up later.
You should always aim to have all shareholders sign the shareholders' agreement. That's done either by approving it at the point of issuance or through a "Deed of Adherence" when they buy shares later.
Agreements with employees — restricted shares or options?
Think carefully about valuation, risk, cost, and tax to figure out the most appropriate type of equity incentive agreement at different points in time. Your goals and the legal room you have to maneuver are important factors. Restricted Stock Awards can be more suitable early on, while options can be more favorable later.
Think about what happens if one of the key people (shareholders) leaves. A shareholders' agreement, or a Restricted Stock Award (RSA), can be critical to making sure ownership stays in the right hands. Read more about RSAs in this article.
Capital raise: traditional share issuance or other financial instruments?
Be careful about signing agreements you don't fully understand. In traditional funding rounds, you can be tempted to accept the term sheet from a professional investor as-is. It's tempting to take the money, but make sure the terms actually align with what you want. If you don't want to go through a standard issuance, financing via convertible instruments can be an option. These come with various mechanisms tied to future ownership structure. Make sure you fully understand the conditions attached and what the future consequences could be, before you sign.
Valuing a startup is genuinely hard, and some founders choose to defer it by signing a so-called SLIP agreement (Startup Lead Investment Paper) with their investors. This lets you secure capital with as little admin as possible, while postponing the valuation conversation, which is often the hardest part at the early stage.
Takeaway
The startup journey calls for careful thinking and a strategic approach to ownership structure. From patient capital to choosing the right people at the right time, to good agreements, ownership structure plays a decisive role. If you think through these points and reflect on how each will affect your startup, you can avoid unnecessary complications down the line. A well-considered ownership structure can be the key to your startup's success — so this is a decision worth paying close attention to.