SaaS Equity Agreements: Splitting Equity between Founders and Employees
SaaS equity agreements are a critical component of any successful SaaS startup, as they help to ensure that everyone involved is aligned and working towards the same goal. In this article, we will explore the various factors to consider when splitting equity between founders and employees, and provide a detailed look at common scenarios and approaches, including cliff and vest examples.
Splitting Equity between Founders
When starting a SaaS company, it is important for the founding team to have a clear understanding of how they will split equity among themselves. This can involve weighing a number of factors, including each person’s role and responsibilities, their individual contributions to the company, and their level of experience and expertise. Some common approaches to splitting equity among founders include equal splits, splits based on individual contributions, and negotiated splits based on a variety of factors.
Splitting Equity with Employees
Once the founding team has split equity among themselves, the next step is to consider how to allocate equity to employees. This typically involves creating an equity compensation plan, which outlines the terms and conditions under which employees will receive equity in the company. Some common approaches to splitting equity with employees include granting options, issuing restricted stock units (RSUs), and providing performance-based equity incentives.
Cliff and Vesting Examples
Cliff and vesting are two important concepts in SaaS equity agreements, and are used to ensure that equity is allocated fairly and to align the interests of employees with those of the company. Cliff refers to a period of time during which an employee is required to remain with the company before they are eligible to receive equity, while vesting refers to the gradual accumulation of equity over time.
For example, an equity agreement may include a one-year cliff, during which an employee is required to remain with the company before they are eligible to receive any equity. After the cliff period, the equity may vest over the next four years, with 25% vesting each year. This means that after one year, the employee will become eligible to receive 25% of the equity granted, and will receive the remaining 75% over the next three years, as long as they remain with the company.
Cap Tables
Cap tables, or capitalization tables, are an important tool for managing and tracking equity in a SaaS company. They provide a detailed record of who owns what percentage of the company, and how the equity has been allocated over time. Cap tables are used to manage equity grants, track vesting schedules, and monitor equity dilution over time.
Cap tables are an essential component of SaaS equity agreements, as they help to ensure that equity is allocated fairly, and that everyone involved has a clear understanding of the ownership structure of the company.
Issues to Consider
One of the key issues to consider in SaaS equity agreements is what happens when a founder or key employee leaves the company. This can result in a significant loss of equity for the company, and can also create a risk of dilution for remaining shareholders. To address this risk, it is common for SaaS companies to include provisions in their equity agreements that address what will happen in the event of a departure, such as a right of first refusal or a requirement to sell back equity. This helps to ensure that equity remains aligned with the interests of the company and its remaining shareholders.
Another important issue to consider is equity dilution, which occurs when new equity is issued to employees, investors, or other parties. This can result in a decrease in the value of existing equity, and can also create a risk of loss of control for existing shareholders. To manage this risk, it is important for SaaS companies to have a clear understanding of their equity dilution rate and to take steps to minimize dilution over time.
Conclusion
SaaS equity agreements are an important component of any successful SaaS startup, and play a critical role in aligning the interests of all stakeholders and ensuring that equity is allocated fairly. By considering key factors such as vesting schedules, cap tables, and departure provisions, SaaS companies can create equity agreements that help to maximize the value of their equity and ensure the long-term success of the company.
If you are looking to create a SaaS equity agreement, it is important to work with a trusted advisor who can help you navigate the complexities of equity allocations, vesting schedules, and other important factors. With the right approach and the right guidance, you can create a SaaS equity agreement that meets the needs of your company and your shareholders, and helps you achieve your goals for growth and success.
