Strategies to Split Equity Among o-Founders
A report reveals that 37% of startups operating today have two founders and 23% have three founders. While deciding on an equity split, 50–50 may sound like an obvious fair choice, but are we considering the amount of work each one contributes, the number of years everyone has been along the ride, or who delivers the best results? Should we consider all these factors while splitting equity among co-founders? The purpose of this article is to bring you a wider picture of what goes into an equity split, what are the issues that may come your way, and what could be possible solutions.
“Investors look at founder equity split as a cue on how the CEO values his/her founders” — Michael Seibel (Y Combinator)
If the founders are not treated fairly among themselves, there is no point in expecting better treatment elsewhere. You must be aware of the options you have and weigh them according to your company’s needs.
Factors to keep in mind
So now you have your company and also a co-Founder or maybe two. Before you cut to chase an equity split, consider the following factors
1. Defining the roles of each founder — One of you might be the CEO, and another could be the one in charge of technology or administration. Founders also take up marketing roles and lead acquisition. So have clarity on what you are bringing to the table.
2. Considering the expertise — How long has everyone been in the industry? How knowledgeable is each one in contributing to the company? Answer them with precision. One’s idea might be the game-changer in the company’s growth. Another one’s timely action might save the company from becoming a disaster. Talk about each one’s contribution to the business.
3. Who deserves the bigger share? — Founders who work better deserve better. Period! Fair split means acknowledging and allocating resources to fair players. Talk to each other if there is a need to split unevenly based on everyone’s performance. The founders of Apple had a 45–45–10 split between its three founders Steve Jobs, Steve Wozniak, and Ron Wayne respectively. While Jobs and Wozniak were the CEO and programmer, Wayne took care of the administrative responsibilities and documentation. This is considered a fair split based on each one’s contribution to the company.
4. What if someone walks away too early? — Address potential difficult situations early in the company setup. What if you split equally and one of the partners quit right after? Consider vesting options and signing an agreement before getting into the company proceedings.
How to split equity among co-founders?
The following steps should give you a better strategy for allocating equity among the founders based on the business activity.
Have a candid conversation
Communicating your expectations and differences must be done as early as possible among the co-founders. Ask what each one’s needs are, and who is the cash contributor. What are the non-cash contributions that your peers are offering? And importantly, have a deeper discussion on what your long-term goals are and how the review of your performances will be done. 65% of today’s startups end up as a failure mainly because there have been disputes among the co-founders.
A Harvard business research reveals that when a founder is ready to offer more equity to the co-founders, it adds better value to the company thereby returning the founder with what he deserves.
Aim for a fair split
You can split your equity either equally or dynamically. Google founders Larry Page and Sergey Brin are still famous for their equal equity split ie., 15% of the shares each. Although it is recommended to split your shares on a 50–50 basis, it is not easy in all cases. You must observe who brings the best outcomes and who helps better in lead generation or marketing. In such cases, Dynamic split is the most prevalent allocation of equity among founders. For example, Oracle founders Larry Ellison, Bob Miner, and Ed Oates had a 60–20–20 split respectively based on their contributions.
Tip: You can set standard formulas for a dynamic split, according to the work assigned to each founder for every monthly cycle.
Schedule Vesting periods
The vesting period is a duration after which the founders can involve with the usage of company shares. The founder of Everykey, Chris Wentz says vesting is a crucial role in building co-founder relationships and recommends at least a four-year vesting period with a cliff of one year. This way, you can avoid ambiguities when someone chooses to walk away in the early days of incorporation. You can also use the assistance of a business lawyer to be more objective.
Get into a written contract
It is advised to have all the financial communications documented. What kind of split-up are you planning on, equal or dynamic? How involved are the founders going to be? What role deserves better share if the split is going to be dynamic? What is your vesting period? Discuss the answers and get them written and signed. Remember to involve all the parties in the signing process.
Summing up
Now that you know the factors to be considered when splitting company equity among co-founders and the strategies to do it gracefully, it’s time to implement them with minimal errors. Eqvista can help you assess the business operations and help you with all the agreements and documentation regarding your equity split. Whether you are incorporating a new business or looking for equity estimation assistance, we are just a call away!
