Understanding Company Ownership Structure Before Joining a Startup: The Big Question on Equity

Photo by Campaign Creators on Unsplash

Who Controls the Company?

The actual control of a company is reflected in its equity structure. Checking the ownership structure allows you to understand who substantially controls the company’s operational direction and the distribution of future profits.

Company Equity Roles

Role	Description	Task
Shareholders’ Meeting	Composed of all shareholders, the highest decision-making body	Elects the Board of Directors
Board of Directors	Has the power to approve matters significantly affecting the company’s capital	Elects the Management Team, reports to the `Shareholders' Meeting`
Management Team	Executives like CEO, CFO, responsible for daily operations	Reports performance to the `Shareholders' Meeting` and `Board of Directors`

Shareholders' Meeting elects Board of Directors
Board of Directors elects Management Team
Management Team reports to Board of Directors
Board of Directors reports to Shareholders' Meeting

Shareholders’ Meeting

Ordinary Resolutions

More than 1/2 of total issued shares present, and more than 1/2 of present shareholders agree. This means at least 1/2 * 1/2 = 1/4 (25%) of shareholders must agree.

Election and remuneration of directors
Resolution on distribution of earnings and dividends
Resolution on accepting reports prepared by the board

Special Resolutions

More than 2/3 of total issued shares present, and more than 1/2 of present shareholders agree. This means at least 2/3 * 1/2 = 1/3 (33%) of shareholders must agree.

Amendments to the Articles of Incorporation
Recall or removal of directors/supervisors

Significance of Equity Percentages

A shareholder with over 2/3 (67%) of equity can convene a shareholders’ meeting to modify the Articles of Incorporation (Company Constitution), setting the game rules and absolutely controlling the company.

With over 1/2 (51%) equity, one cannot reach the statutory meeting quorum alone, but if the meeting is held, resolutions can easily pass with 1/2 (51%) equity.

With over 1/3 (34%) equity, it implies no other shareholder has over 2/3 (67%). Thus, if the shareholder with over 1/3 (34%) does not attend, special resolution shareholders’ meetings cannot be held because less than 2/3 (67%) of issued shares are present.

Percentage	Significance
67%	Absolute Control
51%	Relative Control
34%	Passive Control (Veto Power)

A founder with less than 34% equity runs the risk of being removed as CEO by other shareholders holding more than 2/3 (67%).

Early Equity Distribution Pitfalls

Avoid even splits like 50% + 50% or 33.3% + 33.3% + 33.3% to prevent deadlocks in decision-making due to diverging opinions.

Disagreements can lead to stalemates, causing the company to idle and fail to operate.

There should be a founder with a larger stake to control equity and be the final decision-maker, such as 60% + 20% + 20% or 45% + 35% + 20%. The person with more shares should bear the responsibility of final decisions to avoid company stagnation.

Board of Directors

Ordinary Resolutions

More than 1/2 of directors present, and more than 1/2 of present directors agree. This means at least 1/2 * 1/2 = 1/4 (25%) of directors must agree.

Matters not specifically regulated
Relocation of the company
Establishment, alteration, or dissolution of branches

Special Resolutions

More than 2/3 of directors present, and more than 1/2 of present directors agree. This means at least 2/3 * 1/2 = 1/4 (33%) of directors must agree.

Election of the Chairman
Issuance of new shares for capital increase
Issuance of employee stock option certificates

Employee Stock Ownership Plans (ESOP)

ESOP, commonly known as the Option Pool, is used for employee incentives and talent attraction.

Startups typically don’t have deep pockets and find it hard to offer competitive salaries. In this case, offering company shares can help attract and retain excellent talent.

Not every employee should be planned to receive shares because most employees primarily need cash. It is inevitable that only after monthly basic expenses are met can they accept alternative forms of compensation.

Employees also look at the company’s development.

Such a system helps management identify whether employees identify with the company’s future development from the bottom of their hearts and are willing to bet part of their income on the company’s future growth. Such excellent and committed employees are exactly the partners a startup should find and keep!

Binding the company’s future performance and resulting stock price with employee income naturally creates an incentive effect, making employees spontaneously achieve performance targets and boost stock prices to multiply their own income.

Generally, ESOP taking up 10～15% of the total equity is a range most investors can accept.

Holding a large percentage allows for no meaning; the meaning comes from maximizing the value of each share. So, never cling to a pile of shares unwilling to give employees what they deserve, limiting company growth or causing decline due to talent loss.

If an Employee Stock Option Program (ESOP) option pool wasn’t set up initially, it’s fine. However, VCs usually require it to be established before they enter, so essentially it will eventually need to come out of the founders’ shares.

Types of ESOP

1. Employee Stock Options (Option)

The right given to employees to purchase stocks at a specified price at a future time. If the company’s stock price rises in the future, employees can buy higher-value stocks at a lower price, earning the difference, thereby attracting excellent employees to stay long-term.

When the company’s prospects are poor and the stock price is lower than the agreed price, it is difficult to generate an incentive effect.

2. Restricted Stock Units (RSU)

The company grants stocks to employees for free, but employees must meet certain conditions (such as performance, tenure, etc.) to actually receive these stocks.

If the company plans to give this employee 3% shares, it is usually given in stages, perhaps over three years, giving 1% per year.

After RSUs are issued, they are immediately placed in trust. If the employee meets specific conditions, the trustee bank returns the stocks to the employee.

Compared to Stock Options where employees have to pay out of pocket, RSUs offer a greater incentive to employees. However, the issuance of RSUs must be approved by a special resolution of the shareholders’ meeting, so the threshold for issuance is higher.

ESOP Vesting Rules

Employees receiving these ESOPs usually don’t get the full percentage of stocks all at once; instead, they are given gradually in batches. The most common way is a 4-year vesting period, where you must work at least 1 year to get 25%, and 2 years to get 50%. Leaving before that basically means getting nothing.

Firing the wrong partner is sometimes more important than hiring the right one. It must be dealt with as soon as possible, and a wrong reward mechanism might force the wrong employees to stay.

ESOP Ratios

Role	Equity Percentage
CEO	5% ~ 10%
COO	2% ~ 5%
VP	1% ~ 2%
Independent Board Member	1%
Director	0.4% ~ 1.25%
CTO	0.5% ~ 1%
5+ years experience Engineer	0.33% ~ 0.66%
Management or Junior Engineer	0.2% ~ 0.33%

The first 10 employees can take 10%
The next 20 employees share 5%
The next 50 employees share another 5%

ESOP Policy

If the company is based in Taiwan, the Company Act stipulates that when a company increases capital by issuing new shares, it must reserve 10~15% for employees to subscribe first. However, the subscription price must be the same as that round’s price, so usually, employees won’t participate because they don’t have enough money.

ESOP Taxation

In Taiwan, for unlisted startups, taxation on employee stock options generally involves the difference between the agreed price at execution and the company’s current price being included in personal other income tax. After selling the stocks later, it falls under securities transaction tax, which is currently tax-exempt.

Equity Ownership Ratios

If you are called a Co-founder, your shares should not be less than 10%; conversely, if you are not a Co-founder, you shouldn’t exceed this number either.

Role	Equity Percentage
CEO and full-time Founders	30% ~ 60%
Co-founders and key initial team, early employees, including founding scientists, VPs, or other “C-level” people	40%
Employee Stock Option Program (ESOP)	20%

Equity Represents Contribution to the Company

Contributions given up in pursuit of the startup team’s success:

Monetary contribution
Time
Connections
Ideas
Equipment

It is fair and reasonable that those willing to stake more receive more returns upon success. Those who quit their original jobs to commit full-time bear more risk than those keeping their full-time jobs, and equity distribution should consider this.

Advice on Joining a Startup

Early talent is a very, very important asset to a company. Whether a startup can take off largely depends on the early team, so don’t go in with a playful attitude or ask for a high salary right away.

You have chosen to interview with a team that has just started. You should recognize that the focus of this job is future growth and development, not immediate cash feedback. Moreover, startups lack money the most, so applying to a startup with the mindset of getting a high cash salary is a very strange thing.

You can focus on acquiring company shares as compensation, participating in the results of the company’s operation, sharing good and bad times, looking far ahead, and expecting to work until the company is acquired or goes IPO if no accidents happen.

Questions to Confirm Startup Prospects During Interviews

Since you treat stock as your salary when joining a startup, you must understand how much return you can expect when the company is sold or goes IPO.

If the Founder/CEO only tells you the number of shares but is unwilling to tell you the percentage from the beginning, be careful.

Q: What percentage of the company does your stock (options) represent?

Do not measure equity value by the number of shares. If you have 30,000 shares, but the company’s total shares are 80 million, your share percentage is 30000 / 80000000 = 0.000375 = 0.0375%. When the company is sold for 100 million USD, you can only get at most 100000000 * 0.000375 = 37,500 USD. At an exchange rate of 30, that’s about 1.125 million NTD.

Using 4 years of youth to exchange for 1.125 million NTD, you might as well go to a big company to earn a million-dollar annual salary with an easier workload.

If you get 0.3% shares, and the company is acquired for 100 million USD, you can get 100000000 * 0.003 = 300,000 USD. At an exchange rate of 30, that’s about 9 million NTD. Doesn’t investing 4 years of youth sound much better?

Q: When can I start receiving your stock (options)? How long does it take to fully vest?

Confirm the vesting schedule of the options, when you can get the option stocks, and what the conditions are.

The most common condition is a 4-year vesting plan. If you leave or are laid off in less than a year, you get nothing. After one year, it is given proportionally.

Suppose 12,000 shares are given per year, averaging 1,000 shares per month. 48,000 shares in 4 years. If you leave after 1.5 years, you can get 1000 * 18 = 18,000 shares.

Some insist on giving annually. If you work for 1 year and 11 months, you still only get 12,000 shares, wasting the effort of the 2nd year.

If given over 4 years, it is recommended to negotiate getting 25% after the first year, and then 25% / 12 months = 2.08% proportionally every month after the second year.

In the 1st year, both parties are not sure if the previous cooperation was smooth. For the company, stock is rare, so distributing stock casually is not good for the company’s future development. So if the cooperation is not smooth, the company can dismiss unsuitable people within 1 year, so no stock will be held by unsuitable people.

After working together for 1 year, the company also confirms the cooperation model and both parties’ abilities and suitability, so the company’s risk is greatly reduced. After the 2nd year, you can negotiate with the company to get a proportional amount for each month worked, avoiding the situation where you leave after 1 year and 11 months and the contribution of the 2nd year is all in vain with no equity received, wasting your youth.

Q: What if the company is bought in less than a year?

In companies that protect employee rights more, a clause will be added to the contract stating that if you have worked less than 2 years but are still employed, you will automatically vest up to 2 years’ worth on the day the company is acquired.

Q: What if my position changes after signing the contract?

Negotiate up from the new baseline. Promotion means more responsibility, hoping you put in more energy and time.

So there is a 100% reason to negotiate the treatment you want with the company. For example, every time you are promoted, talk directly to the boss about a 50% pay raise directly converted into equivalent stock. A 50,000 raise becomes a 25,000 raise, and the remaining 25,000 is converted into equivalent stock.

Q: What is your employee equity incentive plan?

Confirm what the company’s equity distribution plan for motivating employees is, and how to give stock bonuses to future core members.

Q: Are there any other terms that will affect the value of my stock here?

Confirm the composition of the stock and the value your stock occupies in the company.

Management Job Titles

Chinese	English	Full English Name
執行長	CEO	Chief Executive Officer
財務長	CFO	Chief Finance Officer
科技長／技術長	CTO	Chief Technology Officer
行銷長	CMO	Chief Marketing Officer
營運長	COO	Chief Operating Officer
人事長	CHRO	Chief Human Resource Officer
品牌長	CBO	Chief Brand Officer
業務長	CBO	Chief Business Officer