When a business begins to boom, anyone who helped the startup along the way will want their own piece. It can be difficult to gauge exactly what work each person has put it, and even harder to have the honest conversation of what equity each party will receive.
Arguments are bound to arise, since the process can never seem ‘fair’ to all involved. So, as a founder you need to know all of the standards you should base your decision on. This involves taking a step back from the situation and following some key guidelines. These are our tips to evaluating and deciding how to split the equity in your startup.
Temptation to give financial contributors the most equity is strong. While capita is important in a startup, that money could have gone right out the door without hardworking employees. The drive and effort put forth needs valued, just as much as dollar bills.
Think of who will also continue to put in this work in the future. The value of a motivated, innovative worker is often understated, and the value they will continue to bring should be noted. The many people who put money into the startup should be considered valuable, as well, but always understand if there was a risk with their investment, or if it was done in a period where a return was highly expected.
If in the beginning of the business, certain standards were brought up, do not follow them if they are viable to the company. A co-founder can seem like a given for the most equity, but the company has probably moved far away from the original idea, so why follow the plan that goes with it. Financial tycoon George Soros has made many hard decisions, and if he stuck with all of the original plans, Soros lifetime net worth may not be as impressive.
While the splitting of equity should be done timely, it should not be done with haste. If it take a couple extra weeks to understand who will be receiving what, then take the time to make a confident and thorough choice. Multi-million dollar companies with large followings can emerge from a small startup; most successful business took time to build to that point. So, if the business truly takes off, the small percentages you are handling could end up to be thousands of dollars of difference.
With this potential in mind, have a conversation with other founders, or those who have always been a part of the process, to hear their opinions or concerns on the matter.
Many startups are composed of family and friends, so it can be difficult to separate yourself from making decisions based on your relationships. Letting your emotions dictate who gets what percent of equity will lead to you looking extremely biased, and perhaps, not understanding the amount of work someone unrelated to you has completed.
It is a tight position you are in, and there will be negative responses no matter what you choose to do. Although, if you make an informed decision based on numbers, effort, and dedication, you will have all the proof to tell others what data went into your decisions.
There is no telling how long the members of the company will be with the business. While splitting the equity always use discretion with the equity amounts and place vesting restrictions on the percents. Having them grow to their main amounts within five years is usual protocol. This may not seem like a problem immediately, you never know when an high-equity holder could abandon their role.
Many settle with organization on an excel spreadsheet. While it is beneficial to organize information on here, there are many newer tools that can make automated information management decisions.
Using a program to organize your employee history, start dates, and even work quotas can help gather the information you’re looking for to base your decisions off of. On the other hand, it is exceedingly difficult to remember everything throughout the course of a set-up and the notes may not be completely accurate because of the mass amounts of work to get a startup off the ground.
Being a founder of a company is not always a rewarding job. Splitting equity can make you an enemy in many eyes, but you must do what is best and fair for the company. It is you who have to live with the decisions of where the equity will go, so always be confident in your well-investigated decision.