Giving Away Equity: How Much is Too Much?

Balancing growth and control—your guide to smart equity decisions.

Equity: Your Most Powerful Asset, or Your Biggest Mistake?

Many business owners dream of building something successful, something that grows beyond them. But to get there, they often face a crucial dilemma: how do you attract investors, incentivise employees, and bring in strategic partners without losing control of the business?

Equity can seem like an easy way to secure funding or reward early supporters. But giving it away without a plan is one of the most costly mistakes a business owner can make.

Too many founders hand out large chunks of their company before fully understanding its future value. Others realise too late that they have diluted themselves out of decision-making power. Some get stuck with inactive shareholders who make it difficult to move forward when the business needs decisive action.

So how do you grow while protecting your ownership? How do you structure equity in a way that benefits both the business and the people involved? Let’s break it down.

The Most Common Equity Mistakes SMEs Make

Giving Away Too Much Equity Too Early

It is tempting to offer significant equity stakes to attract early investors, employees, or advisors. A new business may not have much cash on hand, and offering a share in future success seems like a reasonable trade.

The problem is that equity is permanent. Once it is given away, it is extremely difficult to take back. A business that gives away 30 or 40 percent of its equity in the early stages may struggle later when it needs to raise more capital.

Consider this: a business valued at $1 million today might be worth $10 million in five years. An investor who was given 40 percent early on for a modest investment now holds a stake worth millions, while the founder, who took on all the risk and did the hard work of building the company, may end up with only a minority share. Worse, the investor may now have veto power over major business decisions, limiting the founder’s ability to steer the company in the direction they originally envisioned.

What to do instead:

• Offer smaller equity stakes in early investment rounds. A range of 5 to 15 percent for strategic investors is usually more than sufficient.
• If cash flow is an issue, consider convertible notes or SAFE agreements, which allow investors to convert their investment into equity at a later stage, once the business has a clearer valuation.
• If equity is offered to advisors or early employees, tie it to performance milestones rather than giving it outright.

Not Using Vesting Schedules

Equity should always be earned, not given away upfront. Without a vesting schedule, an employee or co-founder who leaves after a few months could still walk away with a permanent share of the business, even if they contributed very little to its long-term success.

A common scenario is an early-stage business that grants an employee or co-founder a large equity stake, only to have that person leave within a year. Now the company has a shareholder who is no longer involved but still benefits from future growth.

The solution is a vesting schedule. A standard approach is a four-year vesting period with a one-year cliff, meaning:

• No equity is earned in the first year (the cliff period). If the person leaves before this, they get nothing.
• After the first year, equity vests gradually over the next three years.

This structure ensures that only those who contribute over time benefit from the business’s success.

What to do instead:

• Implement vesting schedules for all co-founders, employees, and advisors receiving equity.
• Tie vesting to performance milestones where appropriate, rather than just time.
• Include buyback options in shareholder agreements to allow the business to repurchase shares from departing team members.

Ignoring Cap Table Hygiene

A capitalisation table (cap table) is a record of who owns what in a business. Poor cap table management can lead to unnecessary dilution, disputes, and challenges in raising future investment.

A common mistake is issuing small amounts of equity to multiple individuals—early employees, consultants, and minor investors—without considering how this will impact future funding rounds. Over time, the cap table becomes crowded, making it difficult to bring in serious investors.

Investors look for clean, well-structured cap tables. If too many people hold small stakes, decision-making can become complicated, and potential investors may see it as a red flag.

What to do instead:

• Keep the cap table organised and strategic, limiting the number of individual shareholders.
• If offering equity to employees, consider using equity pools rather than granting direct shares.
• Regularly review the cap table to ensure it aligns with the company’s long-term growth strategy.

How to Protect Your Ownership While Growing Your Business

Understand the True Value of Your Equity

Before offering any equity, step back and consider what it is really worth. Many founders get caught up in thinking about equity in terms of percentages rather than value.

A founder who owns 100 percent of a $1 million company has total control, but a founder who owns 70 percent of a $10 million company has created far more financial value while still maintaining a dominant share. The key is knowing where the balance lies for your business.

Questions to ask before offering equity:

• What is the current valuation of the business, and what could it realistically be in three to five years?
• What contribution is the person receiving equity making to increase that value?
• Could their contribution be rewarded in other ways, such as bonuses or revenue-sharing, instead of equity?

Be Strategic with Investor Equity

Not all investors deserve a large stake in the business. Many SMEs make the mistake of offering significant equity to investors who bring only capital, rather than strategic value.

An investor who also provides industry expertise, connections, and mentorship is worth far more than an investor who simply writes a cheque.

What to do instead:

• Offer smaller equity stakes (5-15 percent) for early-stage funding.
• Structure deals with performance-based milestones, ensuring investors add value beyond just money.
• Use convertible notes where possible, allowing investors to convert their investment into equity later, when the company has a more accurate valuation.

Use Vesting Schedules for Employees and Advisors

To ensure that only committed contributors benefit from equity, vesting schedules should be a standard part of any equity allocation.

A simple vesting structure:

• A four-year vesting period with a one-year cliff.
• After the first year, equity vests gradually (monthly or quarterly).
• Performance-based vesting where applicable, ensuring shares are earned through actual contributions.

Final Thoughts: The Right Equity Strategy for Long-Term Success

Equity is not just a tool for attracting investors and employees—it is the foundation of a business’s future. A well-structured equity plan ensures that founders retain control, incentives remain aligned, and the business is positioned for sustainable growth.

Every business owner should have a clear equity strategy, backed by legal safeguards and financial planning. This is where expert guidance can make all the difference. Understanding how to allocate, structure, and protect equity is critical to long-term success.

If you are navigating these decisions and want to ensure your business remains in the right hands, it pays to get professional advice. The right equity strategy today can determine your company’s success tomorrow.

 -Wendy Loh