It is crucial that you properly split equity among all founders when beginning a startup. Many startups often split equity equally among the founding team – which sounds simple, fair, and easy, but can be a mistake.
Why Dividing Equity Equally is Usually a Mistake
Let’s say founders choose to split equity equally among themselves, either reflexively or in a misguided notion that this division will be fair and avoid controversy. Ask yourself, “does this account for the different contributions we each will make?” The answer is often a glaring ‘No.’ It’s essential to divide equity in a way that properly reflects each founder’s contributions and value to the startup. This can be a difficult conversation for the founders, but it’s always a better conversation to have before launch.
Important Factors to Consider When You Split Equity
What Did Each Founder Contribute to the Startup?
When dividing equity, it’s important to consider the unique contributions each founder has made and will continue to make moving forward. These could include cash, labor, or a combination of the two. For many new businesses, especially tech startups, it’s even common that founders often contribute their own intellectual property. The founder(s) who made these early contributions may demand a larger share of equity, for plausible reasons.
Is the Founder Working Full-Time or Part-Time Supporting the Startup?
In some cases, one or more co-founders may not contribute to the organization in a full-time capacity. They may stay at their day job, while other co-founders may be entirely focused on the organization’s mission, dedicating every dollar and second they can. It’s important to consider the various levels of involvement each founder is committing to when dividing equity.
Which Founder Created the Idea Behind the Startup?
Some startups may place too much focus on which founder created the money-making idea supporting their business, allocating the most considerable portion of equity to that person. However, a successful startup also considers what day-to-day operations and execution will look like – possibly causing the founders to allocate a smaller division of equity to the “idea generator” as a result. After all, ideas are cheap, but executing on the idea is what makes a startup successful.
Which Founders Will Have Greater Responsibility Moving Forward?
Too often, a startup may also place too heavy a focus on which founders contributed more to an organization’s launch, rather than which founders will be critical players in an organization’s success in years to come. For example, software development may be most important when the company is formed, while marketing and finance may become more important when dealing with investors or getting ready to launch the product. For a startup to grow and thrive, these future contributions are key – and must be factored into the division of equity.
Balancing These Factors and Deciding How You Split Equity
While these questions are complicated and may seem easier to avoid, it will significantly better your startup if you have these discussions now. Delaying could open the door to controversy among founders, which can kill a company, so it’s imperative to determine the framework you want to use to divide your organization’s equity – sooner rather than later.
This framework should attempt to value each of the various contributions that each founder has already made, and also examining the contributions that will be made over the next two or three years that are often critical for a startup’s success.