As a business co-founder, there are many decisions you’ll have to make, and deciding how to split equity between co-founders can present some challenges and is made harder depending on how many people you are looking to share with.
If you have a founders agreement, it might have been listed how equity is shared, but you might be having doubts if this is the correct split or a co-founder may leave the business before they have the chance to earn their share.
If you want to make sure this is avoided, there are a few things you can do and how you could potentially improve the commitment and trust of your other co-founders, meaning decision-making is much easier for you.
First, Create A Vesting Schedule
This is something that can be done as early as when you are first drawing up the founder’s contracts, and this entails setting up a system where each founder gets a percentage of their equity at regular intervals.
You can have these payments commence some time into the partnership, so most agreements might not have their co-founders given their shares until a year has passed, and you could do something like a four-year plan, in which 25% is given each year.
A significant benefit of this is that the other co-founders have a reason to be active in the business and keep them invested.
This also applies to shares that may be left by a departing co-founder, and you want to allocate their share equally amongst the other co-founders.
Because you and your co-founders have worked hard to get the company off its feet, you should well be rewarded equally, and an even split means that each member will put in the same amount of effort to make the business successful.
Avoid Inequality, If Possible
Some business owners might have an agreement in place with a 51-49 split, and one of the reasons owners and co-founders agree on this is based on any early work one owner has done over the other, so if one person came up with the idea, for example.
This is known as a dynamic split and can be made for a variety of reasons, some of these include someone having more experience, funding, or having worked longer in the business over the other.
The only way this works is if you want a defined leader in the business and want or give up overall control over voting rights, and if there is any chance that the founder with the lower share decides to sell their share of the company in the future.
It might also make sense if you’re going to be doing more work than the other founder, who might be doing odd bits here and there while having another job, for example.
Ensure you have an in-depth dialogue with your co-founder(s) to develop a natural solution that works for both parties.
When Sharing, Titles May Not Be Important
When deciding how shares should work, some may be tempted to look at titles such as CEO and assume these people should have the better equity share.
Still, you might have a co-founder who is responsible for the technology (a chief technology officer or CTO) or a head of sales who is driving forward the revenue.
Even though the roles are different and the titles are different, if both roles are essential to the success of the new business then you might decide to value each person’s contribution as equal, making for a more effective partnership.
Legal Review of Documents
This is especially important when you are starting your new small business, as you can consult with a solicitor who specialises in commercial law and who can give advice and help with the drawing up of any contracts.
As you begin to gain momentum in your business, investors and employees might come to deserve shares, which could become complicated as the split becomes more muddled.
If you need to make any recalculations, it might be worth revisiting any documentation to ensure that if it needs to be updated, it is done in a legally binding way.
If You Have Doubts
If you have doubts from the outset about sharing what you consider is your idea or company with others, then these doubts will only be emphasised by allocating shares and could start to be detrimental to the business. For example, voting or decision-making rights where it is split 50-50 could be a problem if you don’t think your co-founder contributes effectively and you should ask yourself is whether it’s worth working with them in the first place.
However, if you have come up with the new business idea and you’re concerned about allocating shares to others, then you might want to think about if it would be possible to launch your new idea without the help of others. There are plenty of business advisors who suggest that the original idea is worth very little, instead it is how people contribute to developing and delivering on the idea that should be valued.
So, for example, if you have three co-founders, and one person has the idea but all three are needed to deliver this to make the company a success, then you could do a 40-30-30 split, so there isn’t too much disparity over the equity shares and keeps each member committed in their roles.
The Bottom Line
You should also consider that a business has many functions and moving parts, so you want as diverse a skill set as possible, as your business won’t get up from the ground if all the founders have the same type of background.
Doing this can make a much more energised and committed workplace that doesn’t value one person over the other, and this can make splitting between investors much more manageable as well.
Getting as much advice as possible is important here because there may be some business leaders who might have a difference in opinion, and while this method may work for them, it might not be as effective for others.