Equity is a complex subject and even the most seasoned pro might encounter some words that they're not totally familiar with. This article explains all of the most relevant concepts of the equity world that you might come across on Ledgy.
Stakeholders are all individuals or legal entities that have an interest (ie. a stake) in a company (eg. investors, employees, etc.).
Beneficiaries on Ledgy are stakeholders that receive the benefits of a stake owned by someone else.
The funds owned by the company. On Ledgy, the Treasury can be a stakeholder.
Venture Capitalist, is a business whose sole objective is to assign capital to companies that will return an increase on their investment.
A person or entity who invests in a company at very early stages with the expectation (due to risk/reward) of substantial numerous-x gains on their return.
It's an overview that shows the details of ownership of each group or individual stakeholder (incl. diluted values and percentages) and accompanying economic and voting rights. On Ledgy, you can view the cap table as a snapshot of different times in your company's life.
Types of transactions on Ledgy:
There are quite a few transactions (ie. events that have affected the cap table) you can show on Ledgy. For an in-depth look, read this article.
A valuation is an estimation of the present value of the company or an asset, done by independent appraisers. You can read how to add historical valuations in this article. The Post-Money Valuation on Ledgy is calculated by Fully diluted shares * Latest share price.
Issued shares (%):
Issued shares are the shares that have been sold to and are currently held by the shareholders (ie. stakeholders who hold shares) of a company. On Ledgy, you can see both the full number as well as the percentage owned by each stakeholder or group.
Fully diluted shares (%):
The total shares of a company counting not only shares that are currently issued but also shares that could be claimed through the conversion of convertibles or through the exercise of outstanding options and warrants.
Voting shares are shares that give the shareholder the right to vote on matters of corporate policymaking. In most instances, a company's common shares represent voting shares. Different classes of shares, such as preferred, sometimes do not allow for voting rights.
Share classes (Common/Ordinary, Preferred):
A designation applied to a specified type of stock. Companies that have more than one class usually differentiate them with alphabetic markers, such as "Class A" or "Preferred B" shares. Different classes come with different rights and privileges. You can read all about the set-up of share classes on Ledgy here.
Financing round (Seed, Series A, B, etc.):
Startups raise funds in a series of stages. Especially the initial rounds are funding that a startup receives from private equity investors or venture capitalists, who generally put up money in exchange for a stake in the company (the value of their stake will grow as the company grows).
Dividends are regular payments of profit made to investors who own a company's stock. A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date.
In the Ledgy cap table, it's the net amount of cash and cash equivalents being transferred in and out of a company.
Dilution occurs when a company issues new shares that result in a decrease in existing stockholders' ownership percentage of that company. Read more about it here.
A stock split is an event where company stocks are divided into a specific multiple (eg. 1:2, 1:100, 1:1000). This is usually done if there's a need to increase the supply of stocks, to boost the stock's liquidity. Following a stock split, the number of shares on the market rises, but an investor's investment value in that specific stock stays the same.
A secondary gives the chance to stakeholders to buy and sell the securities they already own. On Ledgy this is reflected as a transfer.
Employee equity is a form of non-cash compensation that provides a share (or multiple) of the company's ownership. There can be different forms and structures of equity compensation.
ESOP (Employee Stock Option Plan):
The legal framework for giving options to employees. The ESOP, or any other employee equity scheme (eg. PSOP, VSOP, etc.), lays out the standard terms and provisions for the grants issued by the company.
Types of grants (options, phantoms, warrants, etc.):
For an in-depth look, please read our article on the grants supported by Ledgy for an in-depth look.
A grant is an award, usually financial, given by an entity to its employees as a benefit that does not have to be paid back, under most conditions. In the case of stock option grants, some have waiting periods (vesting periods) before the grantee can take full ownership of the financial reward.
The waiting period before employees have rights to employer-provided assets. This is a process that happens over time, and it usually defines how long employees have to remain with the company in order to earn the full granted amount of options. You can read more about it here.
A cliff is the minimum amount of time that an employee has to stay at the company before receiving the first batch of vested options.
Actioning the options, putting into effect the right to buy or sell the underlying financial instrument. In practice, this means paying the strike price to transform the options in actual shares. Usually, exercising can only be done within a time frame, called an exercise window, defined by the employer.
Fixed price for a given option grant – the amount an employee must pay to buy each share. It is also referred to as the exercise price or option price.
Pool vs Plan:
On Ledgy, pools refer to the amount of shares allocated to employee Equity, Plans are the different instruments you use to grant those shares. There can be multiple plans connected to one single pool. It’s useful to think of Plans as “defaults” grant settings you can use to easily group employees that are under different rules (eg. different jurisdiction, different grant type, etc.). For more information, see our Pools and Plans sections.
Approved and Unapproved option schemes:
In the UK employee equity schemes are divided into approved and unapproved. Approved are the tax-friendly share option schemes approved by the HRMC (EMI, CSOP, SIP, SAYE), whereas unapproved are all other schemes. When a company grants share options to its employees without using one of the approved schemes, the employee will be subject to income tax and NI when they exercise. The employer may also need to make an NI contribution.