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Splitting to Grow: Distributing Founders’ Equity (Part 1)

“A ship is safe in harbor but that’s not what ships are for…”

Those who start something of their own do so because they believe they have a great idea. If you can relate to this, you will also agree that it isn’t all about money. It is about doing something fantastic, revolutionary, life changing.

And yet, funding or money problems are one of the biggest reasons for start-ups to fall flat.  As a start up, probably the first time that you’ll handle money decisions is when you split the Founders’ Equity.

 

“A ship is safe in harbor but that’s not what ships are for…”

Those who start something of their own do so because they believe they have a great idea. If you can relate to this, you will also agree that it isn’t all about money. It is about doing something fantastic, revolutionary, life changing.

And yet, funding or money problems are one of the biggest reasons for start-ups to fall flat.  As a start up, probably the first time that you’ll handle money decisions is when you split the Founders’ Equity.

There are no formulae either, just like everything else in start-ups.

 

Why should I share what’s mine?

 

Besides a brilliant idea, equity is the greatest treasure of a start-up. Not only is it a reward but it is also a powerful magnet to attract talent and investors and it can help break logjams too.

 

Ever heard of anyone joining a startup for a better salary? No, right? If they wanted to take home that fixed package every month, they would have gone to an MNC where there are benefits plus security. They’ve decided to get their hands dirty because at the end is a larger reward- the Founder’ Equity.

 

You have a brilliant idea, now obviously only a team of fantastic talent will suffice to help you grow. But if the talent is so great, be assured that it isn’t looking at just money. Yes! That’s where the Founders’ Equity comes in handy. Your key resources will expect a bite of the pie if you want them on-board.

 

Raising capital from external sources is one of the most common applications of the Founders’ Equity. Every time you need funding, you can just carve out another slice from the equity pie.  

 

The most interesting reason to split equity amongst co-founder is to avoid logjams in case of disputes. Some start-ups split the equity marginally unequally, for instance between the two founders the split is 49-51. The founder with a larger share has more authority, thus simplifying decision-making during critical differences.

 

Can I keep the biggest piece?

 

Splitting the equity is a complicated subject. And believe it or not, many investors believe that if two people can together reach a mutually benefitting decision on splitting equity, they can definitely work in sync with each other without disputes.

 

What will influence the equity split is this:

1. The most conventional manner of splitting equity is based on factors like whose idea it was. Usually the idea person takes a higher percentage compared to other founders.

2. Another popular and sensible approach is based on who is bringing more to the table. You could reach an understanding regarding that and split equity in favour of the one who is doing more, for instance wearing the double hat of two key corporate roles or working full time as compared to others committed partially.

3. A late entrant in the start up may be allocated lesser equity than those who’ve already been there for a longer time and laid the groundwork.

4. Then there are those with experience. Start-ups often give the more experienced founder a big share. And experience here means the kind of work done and not number of years worked. For instance a serial entrepreneur could have a bigger share.

5. If any of the founders has invested capital, then giving him a larger share is also considered.

6. Team size makes a difference. Often start-ups like to keep a part of equity to attract key resources or employees. If you plan to have a large team, then expect to keep aside a large equity pool and take home a smaller chunk as founders.

 

While these are only some factors that influence it, we’ll also be discussing some other ways of determining the right split.

 

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