Equity and cap table management is too often an afterthought for time (and cash) strapped founders. After all, the day when you exit and shareholders are cashed out seems a long way away when you’re trying to grow fast, raise money and build a business. But the consequences of early decisions can have implications for all shareholders, even years down the line.

John Fraser has seen the full journey from scaling startup through to exit, serving as Finance Director at AI inventory and pricing specialist Peak from 2018 through to its acquisition by UiPath in early 2025. Having seen the frictions and challenges in managing equity and share plans, he then co-founded consultancy EquiCraft to advise early-stage startups on equity plan design.

“In recent years there has been a huge shift in the way startups manage equity,” he says. “Businesses are now growing in a much leaner way, with founders taking direct ownership of share plans for longer. But naturally, few founders starting new businesses are equity experts right from the off.”

So, what risks should founders watch out for when setting up their first equity plan? And is there a way to create sensible equity structures early on, that will ‘age well’ and scale alongside the business?

It’s fairly easy for founders to allocate equity when the company is incorporated. A sole founder will normally own 100% of the company’s share capital at incorporation; if there is a co-founding team, equity can be evenly divided between the co-founders.

But as soon as the company begins to hire employees, and especially when the company begins its first fundraising processes, founders have decisions to make. “Most founders struggle to think about how their scheme will have to change into the future,” says John.

Usually, the clock runs out on procrastinating founders at their first institutional funding round. Until then, equity agreements may have been relatively informal, agreed with simple contracts among early employees. “At your first funding round, investors are likely to push you to create a formal employee option pool. They may also encourage you to create multiple share classes, although at pre-seed and seed this is fairly unusual,” says John.

There are a set of follow-on steps for founders to take once the equity pool is created. Setting up an enterprise management incentive (EMI) scheme is a standard route for founders. EMI options come with significant tax optimisations for employees enrolled in the scheme. Depending on how long employees hold on to their equity, potential capital gains tax once shares are cashed out can be as low as 14%.

Deploying equity sensibly and strategically can make it easier for founders to hire the right people, at the right time. “Understanding how many EMI options you can issue to your employees at any one time is crucial,” says John. This is partly because there are limits to each EMI scheme: employees can be granted a maximum of £250,000 in EMI options each, and also because EMI schemes reach a company-wide upper limit once your gross assets hit £30 million. “These limits clarify your choices when it comes to allocating options to new hires, and they potentially affect the amount you can grant to existing employees in the form of ‘refresher’ grants marking service length or promotions.

Moreover, these same principles serve founders well in a fundraising context. “When a founder clearly understands and models how their equity plan needs to change into the future, that sends a positive signal to investors,” says John.

Let’s think about an example. Imagine two companies raising Series B funding rounds, each with pre-existing option pools worth 10% of their share capital. One founder can demonstrate a clear need to increase the size of the option pool to 15% at the B round, based on their hiring plans and the need to re-incentivise existing employees who will reach the end of their four-year vesting period. The other founder exhibits no plans for enhancements to the option pool over the months and years post-fundraise. Which founder’s proposition will be taken more seriously by investors?.

Raising equity investment means existing shareholders’ stakes will be diluted.

Often, when a startup is raising its first funding round, investors will normally stipulate that an employee option pool should be created as part of the fundraise. John says:

“This is now standard procedure in startups, but it’s an unwelcome reality check for founders.” Read much more from HSBC Innovation Banking’s Glen Waters and Emily Wood on the so-called ‘option pool shuffle’ and its consequences for startup cap tables.

During a funding round, take time to think through your cap table post-raise, factoring in dilution of existing shareholders and exploring how much ‘headroom’ you have for new grants over the coming months and years. Companies like Carta have plug-and-play tools for founders to calculate the ideal size of their option pool, based on hiring goals, anticipated revenue growth and other metrics. To John, this approach has many positive benefits: “As well as letting you have productive conversations about your cap table with investors, properly structuring your equity gives you more cards to play in any conversations with HMRC and accountants from a compliance perspective.”

So what’s in it for founders? On top of their personal financial outcome, the prospect of delivering significant financial returns for employees at an exit is an important motivating factor for many founders.

At Peak, years of strong growth made an acquisition a realistic prospect by the end of 2024. As Peak’s Finance Director, John had a front-row seat to how far an equity plan is stress-tested during a transaction. “The due diligence was incredibly intense. No stone was left unturned: every document was scrutinised, and every employee address was checked,” he says.

And thinking about the whole journey, did Peak encounter any hurdles that could have been avoided? “It’s a cliché, but keeping the cap table as simple as possible is really important,” he says. “We allowed all leavers to exercise their vested options, which is not a bad thing in itself but we ended up with hundreds of individual shareholders on the cap table with very small holdings.

“Our solution was to create a nominee company that became the ‘home’ for all good leavers. We then changed the scheme so that all future leavers would automatically fall under the nominee entity. This was a very complicated piece of work, partly because we waited a while to do it. I would recommend any founders allowing leavers to exercise their vested options to look at setting up a nominee entity sooner rather than later.”

As Jon Bon Jovi said, “We gotta hold on to what we got / Doesn’t make a difference if we make it or not.” Of course, whether or not you ‘make it’ is hugely important to founders, investors and employees.

Planning how and when you’ll make new equity grants over time is a useful signal to your investors and employees alike. As John says, “Being clear and up front about equity grants from the outset of a hiring process gives all stakeholders maximum confidence in the proposition.” Then, adhering to best practices in cap table design can help steer your ship through the choppy waters of any potential exit event. The benefits for founders that begin to think and plan about equity and cap table design early are clear.