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Startup Equity Structuring

What constitutes a standard vesting schedule?

The global standard, also common in Georgia, is 4 years vesting with a 1-year cliff. This means you earn 25% after the first year, and the rest monthly over the next 3 years.

Is phantom stock an alternative to ESOP?

Yes, Phantom Stock gives employees a cash bonus equivalent to the value of shares without actual equity ownership. It is simpler to administer legally and tax-wise in Georgia.

Can I reclaim shares if a co-founder leaves?

Only if you have a Vesting Agreement or Reverse Vesting clause signed beforehand. Otherwise, the founder keeps their full equity even if they leave on day one.

Do I need to register every option grant?

No, individual option grants usually don't need Public Registry filing until they are exercised (converted into actual shares).

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Startup Equity Structuring: Strategy for Share Distribution

A startup's success largely depends on how well the company's ownership (Equity) is distributed among founders, employees, and investors. Capital structuring is not just a mathematical division of percentages; it is a strategic tool for motivating the team and attracting investment. Incorrectly structured equity (e.g., when an inactive founder holds a large stake, known as "Dead Equity") can scare off investors and hinder company growth. Additionally, offering Employee Stock Option Plans (ESOP) has become a standard for attracting talent, although its legal implementation in Georgia requires specific knowledge.

Legal.ge offers comprehensive capital structuring services, including Cap Table management, vesting mechanisms, and option plan development.

What Does Equity Structuring Service Cover?

This service covers all aspects related to company shares and their distribution:

  • Cap Table Management: Detailed accounting of the company's ownership structure, showing who owns shares, options, and warrants, and how this picture will change after future investments (Fully Diluted Basis).
  • Founders' Agreement: A document regulating the relationship between co-founders, including Vesting, roles, and conditions for share clawbacks in case of departure.
  • Vesting: Developing a mechanism whereby founders or employees earn shares over time (e.g., 4-year vesting with a 1-year cliff), ensuring their long-term commitment.
  • Employee Stock Option Plans (ESOP): Developing a plan that gives employees the right to purchase company shares in the future at preferential terms.
  • Creation of Authorized Capital: Creating a reserve of shares (Option Pool) for future employees.

Common Scenarios When You Need This Service

Equity structuring is essential during the following stages:

  • Company Incorporation: When several partners start a business and need fair share distribution and protection (Vesting).
  • First Hires: When a startup cannot afford high salaries and offers options to key employees (CTO, Head of Marketing).
  • Preparing for Investment: Investors demand a clean Cap Table and the creation of an Option Pool before investing.
  • Founder Departure: A situation where one partner leaves the company, and their share needs to be bought back or returned.

Georgian Legal Framework

In Georgia, equity structuring is regulated by the Law on Entrepreneurs. The new law recognizes concepts of "Authorized Capital" and "Options," significantly simplifying the implementation of Western models. Previously, formalizing vesting and options was difficult, but now the law directly allows for conditional capital and share protection.

The Tax Code of Georgia is also crucial. For example, in the case of ESOP, if an employee receives a share for free or below market price, it may be considered a benefit and taxed as income. The lawyer's task is to build a structure so that the tax burden is optimized and does not fall on the employee before the share is realized (sold).

Service Process Stages

Cooperation with specialists on Legal.ge includes:

  1. Cap Table Audit and Modeling: Analyzing the current state and simulating future scenarios (investment rounds).
  2. Strategy Development: Deciding on vesting terms, pool size (e.g., 10-15%), and distribution rules.
  3. Legal Execution: Preparing the Partners' Agreement, Option Agreements, and Meeting Minutes.
  4. Registration (if necessary): Reflecting changes in the Public Registry.
  5. Administration Guide: Handing over a manual to the client on how to manage options and the Cap Table in the future.

Why Legal.ge?

Startup equity is a limited resource. Its incorrect distribution is an irreversible mistake that is very expensive to fix later. On Legal.ge, you will find lawyers who work with startups and know market standards (e.g., 4-year vesting). They will help you create a structure that is attractive to investors and fair to the team. Start correctly with Legal.ge.

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