When starting a new business in Colorado, Kansas, or Missouri it is common to have disagreements over how much equity each founder should receive. In this post we will look at six things you should consider when dividing your startup’s equity to help you avoid disputes. (Learn which business structure is the best for you in this guide.)
In my opinion, this is the most important consideration. Research shows that people problems are the leading reason startups fail (see Noam Wasserman’s book for more). Consequently, it is essential that you divide equity fairly among the cofounders. If you don’t, arguments will develop later. And if arguments develop later, your odds of success fall dramatically.
A founder contributing substantial cash resources (or high-value assets, including intellectual property) may demand more equity than those that are contributing very little. Also consider whether one party is guaranteeing a loan or is putting more of their personal life at risk. There are no pre-defined rules on those items, but they all play a part.
Consider how much time each person will commit to the company moving forward. If one person is quitting their job to devote their entire schedule to the company, they likely deserve more than someone only committing nights and weekends.
What is everyone bringing to the table in terms of skills, knowledge, and connections. For example, the people building the product or service (usually developers, designers, or engineers) often command a lot of equity because they are in high demand. Additionally, someone who has founded multiple successful startups and is well connected to resources in Colorado, Kansas, Missouri, and elsewhere might expect a larger share.
Whatever you do, don’t undervalue what the other members of your team are bringing to the business. You are more likely to succeed as a team, especially if your team is diverse.
Never forget about dilution. As you grow and give away more of your company to investors, employees, advisors, and others, you will get diluted. A 10% ownership stake today can easily turn into 8% tomorrow.
Some people argue the person who came up with the idea deserves more. However, ideas don’t have much value without execution, so giving someone any amount of control or substantial equity just because they came up with the idea can cause fairness arguments later.
(This article is general in nature and is not legal advice.)
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