It can be exciting to start up your business, alongside your fellow co-founders. However, what many newbie startup founders don’t always remember is that there must be a smart, rational division of the equity between the co-founders. It can be tempting to make things easier by splitting everything up evenly, but that would probably be a big mistake that will eventually lead the founding team to arguments and disarray along the bumpy road to building a successful business. There are many key variables that have to be taken into account by the startup idea founder when determining how the equity should be distributed between each of his co-founders. In this post I will try to point out briefly what variables should be taken into account and what I personally think should happen.
An idea is worth money
The first variable is considering to give more power to whoever came up with the original business idea. The originator of the idea should receive a big premium for his creativity and originality, and if he is taking the risk to put money into his own idea, that premium grows even larger. If the creation of the idea is based upon the amount of investment needed, and there is no external investor, the equity would be divided based on the amounts of the cash investment that each of the startup co-founders brings in. Keep in mind that despite all this, ideas do not come into fruition without the execution of a plan. It’s easy to bring a plan to the table, but it can be more troublesome to devise a plan to see it come to fruition. If one of the founders is key to the execution of the plan (for example: your programmer or engineer), you may have to make sure that he feels he has enough equity. This must be done in order to make sure you keep your key co-founder invested in the future startup, and motivated to start working with you.
The second variable is more in depth than just looking at who is funding the business from inside. Those who are contributing money to the business from the outside, investors, should be treated as seed-stage investors, and should see some return on the risks they’re taking with their income. Choose your valuation wisely when dealing with investors, you don’t want to be to greedy and you should never sell yourself short. If you are looking to know more about the different kind of investors, read the difference between an Angel and a Venture Capital.
Remember that you have to vote
Dividing the shares up evenly also places everyone on even footing, so that no one ends up controlling the company. It can be tempting to make even divides, but it will only end up more troublesome in the long run when decisions need to be made. If everyone is on even footing, then plans can only be enacted with a majority or 100 percent consensus, depending on the Articles of the corporation. A company that can’t make decisions usually dies very fast, make sure that you build a system that allows your company to keep pushing forward. Remember: even if you don’t like every decision, an agreed decision between co-founders is better than no decision at all.
Who does what and when
How important is each co-founder’s role within the business? Key executives in the business should receive a premium stake over the non-key executives, due to the fact that they have a higher stake to lose when investing in the business. The more time you’re investing into your company, the bigger of a share you should receive. Working longer hours means that you’re investing more into your company’s affairs and are taking the risk to see everything pan out successfully. Failure would result in a significant loss for you and much less for everyone else who is only working part-time.
Your reputation is key
Reputation in the business is an important key factor in determining how much a startup co-founder is worth to the company. If your main goal is to get investment, then that’s a simple task the majority of entrepreneurs can accomplish. What matters is how investable you are; how willing and eager are other individuals and companies to back you up financially. The less of a risk you’re considered to be, the more reliable of a reputation you’ve created to increase your funding. The development of this repute can take a lot of time and effort, but it’s a long-standing asset that no successful company can do without. You need to remember that you can find yourself one day a serial entrepreneur, and if that happens you want good street credit.
Lastly, it should be taken into consideration whether a startup co-founder is already receiving a salary, or deferring these wages to receive compensation. Refusing to receive paid wages is no different from financing the business itself. You should tackle this issue from day one, you have a life outside of work and this can affect it.
After these considerations have been taken into account by the startup founder, and you still end up with equal shares, then it’s likely that something went wrong along the way. It’s close to impossible for everyone to make an equal contribution in terms of getting the startup company running. Financially, there may be equal shares, but everyone is going to take on a different role in its development, and not all of these roles will be treated equally.
If you do decide to split everything evenly between all of your startup co-founders, then it becomes more of a compromise than a business decision. It can be an extremely tough decision as you don’t want to step on any toes, but responsibilities, contributions and roles all have to be taken into account when determining compensation. Doing this before you make a commitment will make it easier in the long run, for both you and your investors.
Business is not personal
Keep a level head and make sure that things do not become personal when dividing the equity between you and your co-founders. Emotions should not play any part in the business decisions you have to make, and this process should be no different. This startup co-founder dilemma is a tough one that startup founders will have a challenge dealing with, but once it’s overcome, the real work is ready to begin. As with all things in business, you have to make sure that any discussions like this don’t affect the day to day running of the business, and the motivation and engagement of your employees.