“It’s easy to say you don’t care about money when you have plenty of it.”
Ransom Riggs
Well, no matter who says what, money is almost always the root of all complications. Everyone on this planet is hoping for money. While some want money to lead a lavish life, some want it to be enough for regular survival. A business or a startup is no exception to this.
When you plan to start a business, all goes smoothly and sailing to the moment where you have to decide how to split equity among co-founders.
Before proceeding, it is essential to know why splitting equity among co-founders is important.
The foremost thing that you need to understand about running a business is, you rise when you let others rise.
A co-founder will always lessen your burden, be it financially or mentally. When you share your responsibilities with someone, you receive added assistance in work. Moreover, you will have another highly experienced and enthusiastic member who will contribute to your company’s growth by bringing new ideas to the table. You need to value your co-founders, make them feel like they belong to the company’s core team as much as you do. Equity share is in fact, one of the most valuable assets of all time.
One of the most appropriate ways to share equity is by having two co-founders. Now you may think that it should be a 50-50 split. However, this is not always the case. Many times, companies go for the uneven splitting of equity because they face the problem of figuring out who will cast a tie-breaking vote if there are disagreements on substantial matters.
Instead, for the most part of it the split is made unevenly, say in the percentages of 49% and 51%
Sometimes, it may also happen that investors assert 20-30% of startup shares, while founders must usually have over 60% in total. One may also leave some available pool, say a 5%, but at least 10% should be allocated to employees.
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3 Ways To Split Equity Among Co-founders:
Financial Approach
An obvious criterion for equity shares is a financial investment.
In order to find the perfect settlement for this, one needs to reflect on questions like:
- Are they funding the company with their own money?
- Do they hold the keys to long term investment in the company?
- Will their investment be the be the primary force driving the company’s success?
The one who invests more money will expect higher returns. This provides an accurate calculation of ownership based on a person’s financial influence on the company.
This will create lesser conflicts between co-founders because the resource invested is tangible and thus evident enough to depict who deserves more.
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Transactional Approach
Other than money, co-founders also supplement the innovation and creativity associated with the company. They give their time, generate new ideas, and bring other assets to the business through connections. A transactional model lists the different assets each person brings to the venture. Then, after appointing a certain value to each asset, equity is divided accordingly.
One should be able to answer questions like:
- What shall I get in return for whatever I’m contributing?
- How much value does my contribution to the company’s total assets?
- Are the ideas that I bring to the table benefitting/will benefit the company?
Such introspection will give you clarity on how to approach the process of splitting equity through the transactional model.
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The Relational Approach
Co-founders who work on the principles of the Relational Approach assume that all co-founders are uniformly or equally invested in the outcome of the venture.
The Relational Approach:
- Splits equity equally among co-founders as contributions are considered to have the same value
- Sets aside individual contribution
Those who adopt this approach believe that an equal division signifies justice for all and the majority of founders begin with 50/50 equity splits.
One example of how beneficial this approach can be of the company BlackBuck, one of India’s largest trucking platforms. Blackbuck had three founders, and despite differences in contribution, the three partners carefully discussed expectations and unanimously came to a conclusion that, despite the differences in their individual contributions, they share the same dedication to the startup. In fact, one of them had made a significant financial investment, whereas the rest 2 intended to provide more time.
Key Instructions:
- The Co-founder equity split shouldn’t be a hasty decision. Instead, it should thought thoroughly.
- Quarrels over equity can kill an early stage startup real quick.
- How you choose to split equity among co-founders influences how investors judge your startup.
- How you allot equity impacts the co-founder relationship of your company.
The above was Upfoundr’s idea on how to Split Equity Among Co-founders. Hope this article gave you appropriate insights into the same.
Why are co-founders important?
Co-founders are important because they reduce your financial and mental burden. Having someone with who you can share your responsibilities will always give you your individual space.
Why is sharing equity important?
Giving your co-founders the recognition they deserve will eventually boost the company’s growth through collaboration and collectivism. Moreover, in business, you will rise only if you let others rise.
Which method of equity share shall I follow?
It depends on what you as co-founders expect from the company. Thus, you shouldn’t rush, and instead, take everything into consideration and only then decide.
