Founders' Equity

The percentage ownership interest a shareholder holds in a company. Equity stakes determine voting rights, dividend entitlements, and the share of proceeds received in a sale or liquidation event.

The incremental return that investors require for holding equities over risk-free government bonds, reflecting the additional risk associated with equity ownership. The ERP is a critical input to cost of equity estimation under both CAPM and build-up methods.

A style of private equity investment focused on mature, profitable, or near-profitable companies seeking capital to accelerate expansion without ceding majority control. Growth equity investors typically target businesses with proven product-market fit and strong intangible asset bases, providing capital for scaling operations, entering new markets, or funding acquisitions.

Investment capital provided to companies that are not listed on a public stock exchange, or used to take public companies private. PE firms typically acquire controlling stakes in mature businesses, apply operational improvements, and seek exits within 3-7 years.

Net income divided by shareholders' equity, measuring the return generated on owners' invested capital. High ROE can indicate efficient use of equity but should be interpreted alongside leverage levels and the quality of earnings.

A block of shares reserved for future issuance to employees, advisors, and consultants as equity incentives. Option pools are typically established before fundraising rounds, and their size (usually 10%-20% of fully diluted equity) affects both valuation and founder dilution.

Legal entitlements to exploit subsurface resources such as oil, gas, or minerals. Mineral rights are intangible assets that can carry substantial value, require specialised valuation techniques based on reserve estimates and commodity prices, and are subject to depletion accounting rather than amortisation.

The process by which an employee or founder earns full ownership of equity over time, typically over a 3-4 year schedule. Vesting aligns long-term incentives with commitment and usually includes a cliff period (often 12 months) before any equity vests.

What is an option pool and why do founders care?

An option pool is a reserved block of shares (typically 10-20% of fully diluted equity) set aside for employee options. The size of the pool affects how much founders must dilute to hire team members.

What is the option pool shuffle and why is it controversial?

The option pool shuffle is a term sheet requirement to create or enlarge the employee option pool before the round, in the pre-money, so the pool's dilution falls on the existing shareholders rather than on the new investor.

What is the Cap Table and why does it matter?

A cap table (capitalisation table) lists all of a company's shares, options, and convertible securities, showing who owns what percentage of the company — it is essential for fundraising, dilution analysis, and exit planning.