Equity Sharing
Entrepreneurs face many challenges in today’s ultra-competitive business world. This is especially more pronounced among new and young owners who are just entering the game. One common issue at this stage is determining how much equity each founding member of the company should have.
While it is quite common for founders to split equity in their company early on, the process is not as pretty straightforward as most people may think. In most cases, the slicing pie model is usually applied.
Participation and contributions
This model specifies the sharing of equity. Based on the various contributions made to the startup by each founding member in terms of cash, ideas, time, role, supplies, equipment or facilities. For instance, the CEO or CTO of the company would get a much higher stake than an advisor or manager. Because he or she is taking the biggest risk.
Another criteria usually considered in equity sharing is how much each member has contributed and how much each member will contribute in the future. Those who have contributed most to the company should generally have a greater share of the capital than those who have contributed less to the company.
Original idea
Ideally, a premium should be placed on the originator of the idea of the enterprise. Without the original idea, the company would probably not exist. With all other things equal, that means that a 50/50 split between two co-founders, could be 60/40 based on the premium of being the originator of the idea. And for starting the initial development efforts and sourcing the founding team.
Start up
Finally, it may be worth considering what each person gave up to join the startup. Those who left a salaried job with guaranteed benefits may be considered for higher compensations for the risk they took in joining the company.
Solving the equity sharing problem is one of the most challenging and time-consuming aspects owners of new businesses face at the initial stages of starting up.
Business Lawyer
While this article has outlined few of the vital criteria that may be considered in ensuring fair equity sharing among founders. We recommend consulting with an expert business lawyer who can help create a corporate partnership or agreement that puts in writing the amount of capital each founder receives.
In addition, such an agreement should detail how a person can earn or lose additional capital or how equity could be transferred or purchased in the future.
The ideal business lawyer should also be able to conduct research on the best sharing formula for the particular business. Write legal documents to prevent unforeseeable disputes on intellectual property and negotiate settlement terms among the co-founders in case there’s a need for that.