Tips to divide equity among co-founders of a startup
Take advantage of tools and resources:- While there’s something to be said for taking a very hands-on approach to splitting equity, don’t confuse your desire to play a role in the decisions with a need to manually control the entire process. In other words, take advantage of automated cap-table management tools like eShares, which can save time and streamline the process. There are so many sophisticated tools and resources available that you’d be foolish to use only an Excel spreadsheet.
Place an emphasis on sweat equity:- While capital contributions are great (and they can be rewarded by the company issuing convertible debt or preferred stock), what you really want to reward is sweat equity. Equity should almost always be allocated based on who has put in the most work and will continue to do so in the future. If you’re unsure of the latter part of the equation, look at the career intentions of the founding partners.
If one person intends to quit his or her current job to work full-time with the new business, that change will entail much more risk than that of the founding partner who is only willing to work part-time until things take off. As successful entrepreneur Ryan Himmel has pointed out, equity splits should reward a combination of the highest-valued contribution and the largest undertaking of risk.
Don’t move too quickly:- While you certainly don’t want to go on too long without determining a concrete equity split, that task is nothing to rush into. Patience is key, and you and your founding team should spend time listening to concerns, asking questions and reviewing all aspects of the split. For companies that end up being very successful, the difference in a percentage point can mean hundreds of thousands of dollars. Don’t gloss over the details in an effort to avoid making difficult decisions.
Avoid getting caught up in the original idea:- While some weight should be given to the co-founder who came up with the idea, that shouldn’t be the primary decision factor in who gets what percentage. Actual contributions and sweat equity deserve far more weight than the concept. In many cases, the person with the idea has also put in the most work, but this isn’t always true. Just keep that in mind.
Don’t let emotions control decisions:- Co-founders are often personally connected -- either by friendship, family or previous work experience. This usually means you enjoy being around those people or interact with them on a frequent basis (outside of work). This fact can prove particularly cumbersome when it comes to splitting equity, as you don’t want to hurt feelings or burn bridges. So you may have to put in extra effort to avoid letting emotions dictate equity splitting decisions.
Vest all shares:- Finally, it’s important to remember that -- regardless of how the equity is divided -- all shares should be subjected to vesting restrictions. While you may not see this as an issue now, you never know what a co-founder will do in six months or a year. By vesting founder equity, you can ensure that a founder doesn’t leave while he or she still retains a large portion of the company. How you vest is up to you, but typical schedules vest over a period of four to five years, with a large percentage vesting at the conclusio
