All About Subsidiary Equity
All about the little guys.
Read this after Approaching Equity.
What is Subsidiary Equity?
Subsidiary equity refers to the ownership structure of a company that operates under a holding company (HoldCo). [Can also be referred to as the Wittle Baby Company.]
__ Image of Subsidiary __
Unlike regular small businesses without a larger company over it, subsidiaries have a more complex equity structure because they often balance ownership between HoldCo, subsidiary founders, employees, and sometimes external investors.
This topic is one that a TON of Founders (and investors) to overlook in the beginning. If not planned, it can become an awkward relationship to have a subsidiary. Especially when it specifically comes down to ownership splits in such a strong power dynamic.
How Subsidiary Equity is Structured
This is something you want to set in stone. Some subsidiaries are more obvious owns than others. For example, if the HoldCo or Content is named after the Founder of the HoldCo, it’s kinda obvious that the CEO of that channel(s) is not going to have a ton of ownership there. But, if it’s a standalone brand; that can be a toss up if it’s considered a “joint venture” or a regular subsidiary depending on a few aspects that can change long-term situations. Here are some things to consider:
- How much start-up’ing capital do you want to allocate to it?
- Are you expecting the CEO to contribute that set-up cost or just financially contribute to purchase their ownership?
- Will the Employee Stock Option Pool (ESOP) [which is automatically expected] come out of the founder or the Holding Company share?
- Are you planning on ever raising money from outside investors?
- And of course, how much equity does the person who is running the day-to-day of it get?
Subsidiary Benchmarks
That last one is the first hard decision a Founder has to make. Sometimes, this can be easier if the person who will be tackling the day-to-day of it is in alignment and decided. Sometimes these equity splits are more obvious — so less of a partnership kind of company — like that personal channel we just spoke about.
There are three decisions that depend on the type of company:
- Equity ownership breakdown (percentages)
- Type of company it’s registered as (LLC, C or S-Corp, Joint Venture, etc.)
- [If fundraising…] What that initial funding round is raised on (considering that the HoldCo & other assets under the HoldCo can be already priced… can be easier to find a price off of that [Editor’s Note: I’ll talk about this more in a different section.]
To help think about this, these are some general benchmarks that make sense depending on the goal that the Founder has for their new subsidiary company. This might be a healthier approach than strictly assigning benchmarks based on the typical company a Creator might make because, again, these can change based off of what the Creator finds to be important for them to own more or less of.
Why Subsidiary Equity Matters for Creators
The Mechanics of Issuing Subsidiary Equity
So how do you actionably set all of this up? The answer lies in how much equity everyone is getting and how much contracting and/or issuing of shares (the literal here’s what you own process) is needed depending on the strategy that (usually in agreement with the GM/CEO) the HoldCo decides on.
1. Raise an Outsider Round
2. Flux of Internal Capital
Some initial questions:
- Where was the ESOP carved out of?
- Were the shares issued by a priced note or a SAFE?
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