Money has always been the main reason why businesses come into being. Money has been a complicated issue that has laid the foundation to millions of conflicts, taken place all over the globe. In business, these conflicts often happen between co-founders of a company. That is when equity is split between the co-founders and is also the reason why the conflict starts.
Equity here is the securities that make up an entity, and this ownership allows a person to know how much of the company they own. When a company is formed and you have a co-founder, a lot of things will come up. To begin with, you would have to start with deciding who would have what responsibilities and how to divide the job duties. Other than that, you would have to face the decision where you would need to distribute the equity in a startup, your company.
And for this, your mind may be filled with questions like:
- How should you split the equity?
- What would a fair split look like?
- Do you need to go with a 50/50 split in ownership?
This is just the beginning. There are a lot of different questions that might come up which can make the decision much harder for you. In fact, the decision would be harder mostly if you are teaming up with your family or friends to start the business. That is when your decision to distribute equity in a startup has to be right so that you can avoid conflicts.
This article would help you with some questions that you can ask yourself before you make the split so you do not make the wrong decision.
Questions to Ask Before Splitting Equity
Do you and your co-founder(s) have an established relationship and complement each other? If so, you are moving in the right direction and a great start. If you are getting along, it is just one part of what you are going to do together. The next thing is to complete the process where the equity is split between co-founders. And usually, that is where the trouble starts. Here are some questions you can ask before splitting the equity:
Q1: Is/Are the other founder(s) able to offer quality work to the company that can help it grow?
Fortunately, every person has a track record of what they have done in the past and what they can do. And if you know the person well, it is much better. But whether you know them or not, it is always better to interview the people the founder(s) worked with to understand them better. It would help you be clear if they would be good for your company or not. If they have created something, ensure that you give time to test out what they have created and ensure that it is up to par.
Now, let us say that you do not have a resume. In this case, you would need to find out about the person in the community. Learn all about their reputation. What is their reputation like in the community? In case they have a good reputation, then you have the right people by your side. And in case the reputation turns out to be bad, it is better for you to stay away.
Moreover, if they do not have a reputation at all, you would have to do your own homework and learn more about them. This can be done by giving them one project to work on and see how they deal with it.
Q2: Are their priorities the same as yours in terms of the company?
Is the person moving from one mess to another? Some people are very talented and likeable, but this does not mean that they always have everything in order. Before you distribute equity in a startup, you would have to ensure that the person you are about to partner with has the same priorities as you for the company.
Q3: How long will this/these person(s) stick around?
Does the person you are becoming a partner with have a solid source of income? Or is this project the only source that he/she has for income? In case this is the only thing they are working on then there is a chance that they would become discouraged after a while. In short, they would want to work for a paid project. So, it is important for you to ensure that the partner you are taking up is able to take care of themselves financially.
If the person is able to work through all the difficulties, then you have a good partner. But just to be sure you don’t lose all, when you are about to undergo the equity split between co-founders, put the person on a vesting schedule so that your judgement doesn’t turn against you.
Also, if you are a person who is not able to attract any partners, then there might be some issue with you. You would also need to work on yourself so you are ready for this. All other co-founders are looking for the same skills and commitment that you are looking for in them.
Q4: What role will they play in the long-term?
It’s important that you don’t make all of your equity decisions based on the company’s current state. You’ll be working on this project for years to come ー possibly your whole life.
Generally speaking, you should want to work alongside a co-founder in the same situation as you, in terms of experience and commitment. Meaning, you both will follow the same learning curve and will be on the same page as you enter each new stage of your company.
Q5: Should You Split the equity into 50/50?
Yes, according to Michael Seibel who is the CEO of Y Combinator, co-founders are the people you are going to go on a war with. In fact, you would be spending more time with these people than you would with any of your family members. These are the people who would be making all the major decisions of the company with you. And ultimately, these are the people who you would celebrate with when you succeed.
Michael feels that when you distribute equity in a startup, it should be equal or close to equal among the founders. Basically, if you are not ready to give your partner an equal share then you have chosen the wrong partner for the project. Hence, it is always better to get the best partner on your side.
Is Equal equity split a good idea?
If you ever give time and search the web for this topic, you would see a lot of results regarding the significant inequality among different founding team members. And the reasons are pretty sad and childish. Some of the mainly cited reasons include:
- After I launched my MVP, I brought on my co-founder. He/She didn’t do much in the project.
- I was the one who raised millions of dollars for the company and then brought in my co-founder.
- I am much older and experienced than my co-founder.
- I worked for longer than my co-founder.
- My co-founder takes a salary and I am putting all the money back in the company. I am sacrificing more.
- This is the distribution we agreed to.
- I am the one who came up with the idea.
And these lines screw up everything in so many ways. A company takes about 7 to 15 years to build and have a value. And picking up small variations in the initial stages do not justify the difference in the equity split. In fact, equal equity split between co-founders is what gives all the founders motivation to grow the company. Moreover, getting a larger part of the company is not worth it for the lack of motivation of your fellow founder(s).
In fact, if you are not able to value your co-founder, then expect the rest of the world to do the same. Not to mention, the investors make their decision based on how the co-founders split the equity. Startups are about execution, not about ideas.
In fact, if you are afraid that you might break off with your co-founder later on, it is better to put a vesting schedule on the equity. This means that if the founder leaves before the vesting period, they get nothing from the company. If the founder sticks around, then you know that they would be there for a long time with you and the company.
How can Eqvista help you?
With this said, you now know what you need to do and how you need to treat your co-founder. You need to be fair and supportive when you distribute equity in a startup since the people you offer them to are the ones who would help you in growing the company. And once you have distributed the equity, you would need to keep track of it.
It is important to keep track of all the equity that makes up your company. To be clear, it would help you make decisions where you do not give up all or most of your ownership while giving out equity to employees or during capital raising rounds. And for tracking the shares, it is better to use a software like Eqvista. It would allow you to track and manage all the shares in your company. Moreover, you would be able to easily update it and this would help you distribute the equity in your startup. Check out Eqvista here to begin using it or contact us to know more!