"Key Considerations for Structuring Founders' Shares and Investor Equity in IT Companies in the Netherlands"

In the founding documents, it's crucial to define the equity shares of the company’s founders from the outset. This will influence the company’s management structure and the distribution of profits and losses.

Equity Distribution Among Founders:

• Each founder will have a certain percentage in the company’s equity, which will affect their rights in the company (voting rights, decision-making, etc.).
• Founders may agree on the size of their shares based on their contributions to the company (e.g., capital investment, technology, or expertise).

If future investment is expected, it's essential to plan ahead for the dilution of founders' shares.
Right to issue additional shares: It’s important to include provisions in the founding documents that outline what will happen when the company issues new shares for attracting investors. This will help prevent significant dilution of current shareholders’ equity.

Equity dilution occurs when new investments are made, and the number of shares increases. This reduces the percentage of equity held by the current founders and investors.

What to consider about equity dilution:

• Dilution Strategy: It's vital to define the conditions under which founders' shares might be reduced, and how new investors will be onboarded.
• Protection Mechanisms: You can include provisions to allow founders to maintain their equity (e.g., through preferred shares, which allow them to buy additional shares at a discounted price).
• Investor protection: When attracting investment, it's important to discuss what percentage of the company investors will receive in exchange for their capital. This depends on the company’s valuation, its stage of development, and market conditions.

When attracting external investors, you need to agree in advance on what equity stake they will receive in exchange for their capital. Consider the following points:

• Investor Equity Size: Ensure that the conditions for determining the share of equity future investors will receive are clearly outlined. This could be based on the company’s valuation and terms of the investment deal.
• Conditions for Additional Investments: It’s essential to agree on how future rounds of investment will affect the equity of existing shareholders. For example, as the company attracts more capital, the founders' equity could be reduced, and this should be carefully considered in advance.

Example:

If the company is initially valued at 1 million euros, and an investor is willing to invest 500,000 euros, they may receive 33% of the company (500,000 / 1,500,000). It’s important to state how future funding rounds will affect the shares of the founders and ensure that they are comfortable with the potential dilution.

In the Netherlands, companies can issue different types of shares (common shares and preferred shares), and it’s essential to decide which types of shares investors will hold in advance.

• Common Shares: These provide voting rights at general meetings and a share in the company’s profits.
• Preferred Shares: These may provide rights to dividends or liquidation payments but may not grant voting rights. Preferred shares can be attractive to investors as they provide greater security.

Preferred shares can be particularly useful if you need to offer investors additional rights or protection from risk.

It’s important to define the mechanisms that will protect the interests of the founders in case of equity dilution or future investor involvement:

• Pre-emptive rights: This mechanism allows current shareholders the right to purchase new shares before they are offered to outside investors, helping them maintain their proportional equity.
• Lock-up period: A lock-up period can be included to restrict founders or investors from selling their shares within a certain period after the initial investment.

It is also important to plan for an exit strategy for investors in case they wish to exit the business in a few years. This may include:

• Secondary market for shares: The option for shareholders to sell their shares on a secondary market.
• Company sale: Provisions outlining how the company can be sold and how investors will share in the sale proceeds.
• IPO: The option for a public offering, allowing investors to sell their shares on the open market.

Determine how voting rights will be distributed among the founders and investors. In some cases, investors may require special rights to make key decisions (e.g., veto power over strategic decisions of the company).

ConclusionWhen creating the founding documents for an IT company in the Netherlands, it is crucial to clearly define the founders' equity, the terms for future investors, and the management structure of the company. Given the potential for attracting investment, it is essential to address the mechanisms for equity dilution, investor rights, and the protection of the founders' interests from the outset. These aspects will play a critical role in the company’s future growth and maintaining a balance of interests among all stakeholders.