Splitting Equity

http://www.freeimages.com/photo/987790I’m often asked how Platypus TV divided equity, especially considering our tech co-founder was brought on after the two original founders had been working on the idea for some time. I think that how each team divides their equity is an interesting insight into the group dynamic. Because I get to speak to a number of startup co-founders, I’ve had the chance to have the equity discussion a number of times. Not every startup has an easy solution to the question of who is entitled to what. If you are looking at how you should split equity, you should consider a few things. Disagreements One of the benefits of an even split is the ease of making that decision. One of the very negative aspects can be a standoff if a disagreement over an important company decision occurs. This can be very problematic for early stage startups with an even number of co-founders since with even split equity there is no tie breaker. Walking into this equity decision you should seriously consider who you want to make the final decision when it comes down to a major choice. Who do you trust to take all viewpoints into account and make a decision that is best for the company? Understand where your co-founders’ loyalties lie and what inputs they will pay most attention to. Choose someone to have a bit more equity, allowing them to prevent a tie in the event of a spit decision. Even if the final decision wasn’t your choice, preventing the stagnation that can occur due to indecision will be beneficial in the long run. Understand Who Does What Prior to discussing equity split, you should have a complete understanding of each co-founder’s skills, expertise and responsibilities, not only for the time being, but for the long term.  Responsibilities and roles will be added as you grow and divided once you are able to add more staff to the team. Knowing where the original co-founders plan to be as the startup and their careers mature should be part of the equity discussion. Calculate I found a few helpful equity calculators online, specifically this one from foundrs.com and this one form foundersolutions.com. This Founders Pie Calculator shows you how to create a weighted scale to determine equity percentage. Although I feel these calculators are overly simple, they do allow for a point of discussion among co-founders and can begin to offer a baseline as to how your company should be split. Have the Talk I see some early stage startup co-founders, especially in the collegiate startup sphere, who are worried that having this conversation will lead to problems or disgruntled co-founders. I’m always surprised by this sentiment because I couldn’t imagine working with people who wouldn’t want this conversation, and any tough conversation, confronted head on. In a startup there are so many decisions and you have to rely on your co-founders heavily every step of the way. Seeing how the people I work with handled this conversation allowed me a preliminary insight to how they would deal with other issues that crop up. Write it down Having the talk should be a precursor to writing and signing founder’s agreements that say how equity is accumulated and what happens if things change. Many a fledgling company is crippled when a founder leaves, taking 33% of the company with her. A proper founder’s agreement specifies a vesting schedule, whereby each founder accumulates equity over time (typically four years). If they leave the company, they only take with them the equity they’ve vested, making it possible for the company to use the remaining equity to recruit a replacement. In the end, how you divide your startup’s equity is completely up to you and your co-founders, but it is a decision that should be carefully considered. Equity is one way you and your co-founders gain appropriate compensation for building the company. But there are implications beyond compensation that will affect the future of the company, especially as it needs to raise capital from investors. So although in the end it’s entirely up to you, this is a great time to tap experienced mentors and advisors for input.

James Shomar
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