In Part 1 of this article, we discussed the crucial part equity plays in a startup, why you should split it, and what influences who gets what share.
In this part, we’ll take up from there and discuss one of the more popular ways to split equity between founders.
A more scientific way of doing this might be following this method by Frank Demmler, Assistant Teaching Professor at Carnegie Mellon University.
Am I too late to share?
Diluting equity too early or late, both are harmful. When you do it too early, you do not give the team dynamics a chance to form and the founders do not get a chance to define and grow into their roles properly. Plus, this is just the beginning; you’ve not worked with each other enough and have no joint experience. Imagine how that’s going to go! Then the worst happens – you end up redoing the whole exercise and go into re-negotiations.
On the flip side, if you wait too long, you might experience high tension between the co-founders and it would only distract you from your business. A year after he became partially uninvolved, are you going to remember that founder who contributed to many breakthroughs earlier?
If you’re worried that splitting is too much of a hassle and there’s no guarantee your co-founder won’t run away with your equity, there’s the process of ‘vesting’, which will protect the start-up’s interest. It never makes sense to give anyone equity without vesting – which is a mistake a lot of first-time startups make. Vesting basically ensures that the person earns his share – he puts in a certain amount of time first, and can only then stake a claim. 4-5 years is a good vesting period, which might be a bit long, but rewarding, just like everything else in a start-up.