Unlocking Success: Essential Equity Ownership Concepts for Building a Startup in Canada

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Written on: May 22, 2023

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Essential Equity Concepts for Canada Startup

As an immigrant entrepreneur or startup founder in Canada, setting up your first company can be an exciting and challenging experience. One of the critical aspects of starting a business is understanding equity ownership, which includes the cap table, class of shares, common shares, and preferred shares, as well as venture capital (VC) financing and different series of funding rounds.

Cap Table

A Cap Table or capitalization table is a record of all the company’s securities, including stocks, options, warrants, and any other forms of equity ownership. The Cap Table provides a snapshot of the company’s ownership structure at a particular point in time. It typically shows the number of shares owned by each shareholder, the type of shares held, and the percentage of ownership. It also includes any outstanding options or warrants that may convert into shares in the future.

Class of Shares

A Class of Shares refers to a group of shares that have the same rights and privileges. Companies often create multiple classes of shares to cater to different types of investors or to provide flexibility in decision-making. For example, a company might issue two classes of shares, A and B, where class A shares have ten votes per share, while class B shares have only one vote per share. This arrangement gives more voting power to the class A shareholders, who are typically the company’s founders or early investors.

Common Shares

Common Shares are the most common form of equity ownership in a company. They represent a portion of ownership in a business and typically come with voting rights. Common Shareholders have the right to vote on important company matters, such as the election of the board of directors and major corporate decisions. Common Shares generally receive dividends only after all preferred shares have been paid. However, common shareholders have the potential to earn a higher return if the company performs well.

Preferred Shares

Preferred Shares are a type of equity ownership that provides certain rights and privileges over common shares. Preferred Shares may not have voting rights, but they rank higher than common shares in terms of priority for dividend payments and liquidation preferences. When a company issues preferred shares, they usually come with a specific set of terms and conditions, such as conversion rights, redemption rights, and liquidation preferences.

Angel Financing

Before a startup reaches the seed round, it may seek funding from angel investors. Angel financing involves individual investors who provide capital to startups in their early stages in exchange for equity ownership. Angel investors are typically high-net-worth individuals (or a group of them taking the form of an investment vehicle) who have experience in the industry or a strong interest in supporting startups. Angel financing can be crucial for startups to get off the ground, validate their business model, and attract subsequent funding.

VC Financing and Funding Rounds

Venture capital (VC) financing plays a crucial role in the growth of many startups. VC firms invest in early-stage companies with high growth potential in exchange for equity ownership. This type of financing enables startups to secure the necessary funding for product development, market expansion, and scaling operations.

VC financing typically occurs in different funding rounds, commonly referred to as Series Seed, Series A, Series B, and so on. Each series represents a distinct stage of funding and is associated with specific milestones and valuation expectations. Let’s take a closer look at some of the commonly known series:

  • Series Seed: The Series Seed round is the initial funding round for startups. It typically occurs in the early stages and is focused on providing capital for product development, market research, and building a minimum viable product (MVP). During this round, angel investors or early-stage VC firms invest in exchange for equity ownership. The valuation of the company in the Series Seed round is generally lower compared to subsequent rounds.
  • Series A: The Series A round comes after the Series Seed round and is aimed at fueling the company’s growth and expanding its market presence. This round involves larger investments from VC firms, often specializing in early-stage investments. The Series A round is typically characterized by a higher valuation and a more mature business model. Startups use the funds raised in this round to scale their operations, hire key talent, and further develop their product or service.
  • Series B, C, and Beyond: As a startup continues to grow and achieve milestones, it may proceed to subsequent funding rounds such as Series B, Series C, and beyond. These rounds are usually focused on further scaling the business, expanding into new markets, or acquiring other companies. The valuation of the company tends to increase with each funding round as the startup demonstrates its potential for continued growth and success.

It’s important to note that the terms and conditions of VC financing, including the rights and preferences of preferred shareholders, are negotiated between the startup and the VC firm. Founders should carefully review the terms to ensure they align with their long-term vision for the company.

In Summary

Understanding the Cap Table, Class of Shares, Common Shares, Preferred Shares, angel financing, seed rounds, and the basics of VC financing and funding rounds is essential for any entrepreneur or startup founder in Canada looking to set up their first company. These concepts will help you make informed decisions about equity ownership, voting rights, dividend payments, and raising capital through angel investors and VC funding.

Once you’ve gained a basic understanding of these concepts, it’s highly recommended to consult with a lawyer or professional accountant to fully grasp the legal, tax, and financial implications of your decisions.

How Can Trustiics Help?

With Trustiics, finding a lawyer who can guide you through the legal complexities of starting and growing your business is made easy. Sign up on Trustiics today to explore a diverse network of vetted lawyers and access the expertise you need.

Don’t forget to take advantage of the Quick Legal Consultation service, available for a flat fee of just US$120. This service offers you the opportunity to address specific legal concerns or seek immediate advice, getting valuable insights and guidance at an affordable cost.

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