Guidelines for Risk Avoidance in Equity Design of Non-listed Enterprises

As the fundamental cornerstone of corporate governance, the rationality of equity structure design directly determines the stability of an enterprise’s long-term development. Below are four core risk prevention and control principles clarified from a practical operational perspective.

I. Principle of Prudence in Equity Transfer for Short-term Resource Consideration

As core equity assets of an enterprise, equity shall be strictly allocated to only two types of parties:

1. Core founders and full-time key employees who participate in company operations in depth throughout the entire business lifecycle;
2. Strategic cooperative partners that can deliver irreplaceable long-term value to the enterprise.

In practice, some enterprises transfer equity to resource-oriented clients in a one-off manner in exchange for short-term business resources. Such resources are usually sporadic and phased; their value contribution is neither sustainable nor necessarily the optimal option for corporate development.

Therefore, the core criterion for equity consideration is whether the corresponding resources are scarce long-term assets that cannot be directly acquired through monetary transactions in the open market.

II. Principle of Prohibiting Equal Equity Allocation Structures

To avoid early-stage decision conflicts and maintain partnership relations, some founding teams adopt an equal equity structure — typical examples include two partners each holding 50% equity, or three partners each holding 33.3% equity.

Such structures are essentially governance arrangements with mismatched rights and responsibilities. Despite seemingly equal allocation, there is no clear ultimate decision-maker, making it impossible to resolve major decision-making disagreements amid corporate development. They carry an extremely high risk of governance failure in the long run. Statistics show that the survival rate of enterprises with such equal equity structures is less than 15%.

III. Principle of Rejecting Capital Contribution as the Sole Basis for Equity Allocation

The core value drivers of startup enterprises cover multiple dimensions: human capital, technical patents, industrial resource integration capabilities, and more. Monetary capital contribution is merely one component of initial value contribution.

If initial capital contribution is taken as the only basis for equity distribution, the actual contributions of full-time operational core members, R&D leaders holding core technologies, and partners with key industrial resources will be severely underestimated. This will eventually lead to an imbalance in the long-term benefit distribution mechanism and trigger the risk of core team turnover.

IV. Principle of Pre-agreed Exit Mechanisms

Equity structure design must cover both positive incentive scenarios and negative exit scenarios, among which the pre-setting of exit rules takes far higher priority than profit distribution rules.

Upon enterprise establishment, a written partnership agreement shall clearly stipulate:

• Triggering events for equity exit (such as voluntary resignation, breach of non-compete obligations, dismissal due to incompetence, death, etc.);
• Corresponding exit procedures;
• Equity repurchase pricing standards under different scenarios (e.g., discount based on net assets, original capital contribution amount, discounted valuation based on the latest financing round).

Clarifying rules in advance can minimize subsequent equity disputes and reduce governance costs.

Equity structure design is a systematic governance arrangement tailored to an enterprise’s development stage and core resource composition. Its core goal is to motivate key talents, improve decision-making efficiency, and implement a benefit-sharing mechanism through the unified alignment of rights, responsibilities and interests.

Intentionally exploiting information asymmetry and regulatory loopholes to obtain excessive equity during the design process essentially undermines the trust foundation of partnerships. It will ultimately lead to the disintegration of the core team and stagnation of business operations. At that point, equity will merely become sunk assets requiring additional disposal during enterprise liquidation, with no practical value whatsoever.