How to Fairly Split Equity Among Cofounders

Starting a new business in Colorado, Kansas, or Missouri can be an exciting venture, but do you know how to split equity among the co-founders? If you do it wrong, you may face costly disagreements and derail your progress. To help you avoid disputes, here are several important factors to consider when dividing equity in your new company.

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Split Equity Be Fairly

Fairness should always be the top priority. Research shows that “people problems” are the leading reason startups fail. It’s crucial to divide equity in a way that feels fair to all founders. If this doesn’t happen, arguments are inevitable and those disputes significantly reduce your odds of success.

Capital and Contributions

Think about what each founder is contributing in terms of capital (money) and assets. If one founder is bringing substantial cash or high-value assets (like intellectual property), they may deserve more equity. Also, consider if anyone is guaranteeing a loan or putting their personal life at risk. While there are no set rules, all contributions should be taken into account.

Clear communication about contributions will prevent misunderstandings down the road.

Day-to-Day Responsibilities

Consider the time each founder will invest moving forward. If one person is quitting their job to work full-time on the company, they likely deserve a larger share than someone who’s only working part time on the new venture.

Experience, Skills, and Networks

What unique skills, knowledge, and connections is each person bringing? Developers, designers, and engineers who build the product often command significant equity because of the specialized skills they provide. Someone with a history of launching successful startups and strong connections in Colorado, Kansas, Missouri, and beyond may also expect more.

For example, a cofounder with key connections to investors or strategic partners can bring immense value that’s worth considering in the equity split.

Leadership and Vision

It’s important to consider leadership roles and the overall vision for the company. Who is steering the ship? Founders who take on key leadership roles (like the CEO) carry additional responsibilities that may justify a larger equity share.

Beware of Dilution

As your startup grows, dilution will occur. Investors, employees, advisors, and others will want a stake in your company, which means your ownership percentage will decrease over time. A 10% stake today might become 8% tomorrow. Keep this in mind when agreeing on equity.

Vesting Schedules

Consider implementing vesting schedules to protect against founders leaving early. Vesting ensures that equity is earned over time, which can prevent resentment if one founder decides to leave prematurely.

Such vesting aligns everyone’s incentives with the long-term success of the company.

The Value of the Idea

Some founders argue that the person with the original idea deserves more equity. However, ideas are only valuable with proper execution. Giving a disproportionate share to the idea person can lead to resentment and fairness issues later.

*This article is general in nature and is not legal advice.