It is very difficult for founders to share their equity with partners and investors for fear of hurting feelings,making difficult decisions and even loosing their businesses. To avoid this problem, the sharing of equity needs to be done fairly but the big question is HOW? I answer this big question each time i work with startup especially at the funding level as an investor.
It is important to know that every one wants some equity with no regards of the amounts of work put in.Sharing equity in regards to the persons role in the company is ideal but the key executive should get a premium stake over non-key executives. this means that the founder or founding members have to hold maturity of the shares at the start. In this case,a tiered pay plan can be put in place and equity calculated as total ownership divided by founders or co-founders tiers.
It is also very important to take into consideration some key areas like the funding phase of a venture. at this point, who is funding the business is a key point consider in sharing equity ( while is he or she funding and the type of investor). With all other things being equal, equity split would be adjusted for cash investment. Those funding the business need premium as cash funding founders are not different from seed stage investors. It should be noted that we have different funding stages in a business.
Sharing equity with no bias, and or conflict, you need to put your emotions under control. letting your emotions control your decision either by thinking that, your co-founders are your friend, family or previous co-workers is not healthy in equity splitting. It is true that most co-founders are often personally connected by either friendship or family which means you enjoy interacting with them frequently even outside work.Yes, but in sharing equity you have to put in extra effort to avoid your emotions interfering with your decision.
In dividing equity, it is important to subject all shares to vesting restrictions. It is difficult to predict a co-founders action over a period of time say one year. by vesting all shares, you can be sure that founders do not leave while having a large potion of the company.
As a founder, having a concrete equity split is always a call for concern. But it is important to know that the task of sharing equity is nothing to rush into founders, investors and partners needs to take time asking questions and taken all aspects of split into consideration. While as a founder you certainly don’t want to go too long without determining a concrete equity split, patience is the key.
looking among the co-founders, the originator of the idea should be given a premium for bringing the initiative and starting the development, it should be noted that the founder has more vested power and share or equity sharing count a lot on negotiations .
As an VC, looking at the reasons above it is worthy of note that sharing equity is a tough task so be careful before distributing shares among partners and founders, go in for what i term smart investors. investors that bring value and not just money.
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