Equity. All early stage startups excited about “THE” idea have to deal with this sensitive topic. It’s easy to feel as though splitting founder shares in a fair manner is the most diplomatic. This may be the urge if your business partners are friends. BUT an equal and equitable split are different, and the distinction matters.
Equality vs. Equitability
So what is the difference?
Equality means everyone gets the same amount of shares. Equitability means each individual gets as much shares as he/she has earned.
Consider that most startups substitute equity for income. You wouldn’t expect everyone to receive the same salary at work. Time commitment, value, and risk all matter. Equity is no different. It acts as an incentive for co-founders to make meaningful contributions to the business. If everyone received the same amount with no conditions, why work at all?
In making the comparison to a salary, it is worth noting that equity has the potential for growth. If the startup blows up, so does the value of shares. At that stage, 1% can make a difference of 10,000,000 dollars (if you blow up in the truest sense of the word, that is). The more equity you own, the more skin you have in the game and the more you are willing to see improvements in growth. Utilizing this as a financial motivator is powerful. Keep in mind though: money should NEVER be the primary reason you join a startup.
Great. So I should split equity equitably. How does that work though?
Splitting Equity Properly
To reiterate, splitting your equity properly is vital to the success of your startup. It can boost your team’s productivity. Here are a few guidelines to follow to make sure you get it right from Day 1:
- Address It Openly and Early Equity is by no means the first topic to discuss. But, you should settle it before going to pitch to potential angel investors or VCs. The issue becomes more sensitive as the value of the business grows. So, tackle it early on to avoid any awkwardness. When discussing how to split with co-founders, be honest and listen. There’s no point in someone attempting to “suck up” what is considered an uneven split. Bottling up discontent or demotivation is far more uncomfortable than openness. It may be surprising to hear everyone’s true thoughts. But honestly, can establish trust and clarify everyone’s standing . Discuss it, lock in and focus on your vision without any distractions. Then, you’re set up for success.
- Ensure Shares are Vested Vest your shares in alignment with your growth goals. This ensures your cofounders don’t just sell off shares right from the start. If they can contribute the most value, use shares to keep them on board. This also ensures the financial reward comes with responsibility and empowerment.
- Decide Who Will Make Decisions One of the co-founders needs a majority (i.e. 51% in decision making). As much as it is wonderful to share evenly if a disagreement arises, someone has to call the shots. If two co-founders have equal decision-making power, a dispute may drive them apart. In a group, ganging up or strong-arming creates hostility and politics. Majority ownership should not replace dialogue. All co-founders should consult in key decisions. But, if a serious conflict should arise, it’s important to ensure the team isn’t torn apart. Some needs to take control. This avoids the “blame game” – one person calls shots and is 100% accountable. This person should exhibit strong leadership qualities.
- Value the Value Added Above all, divide equity according the value people contribute. Even if someone is only working part time. Especially if their work is better than a cofounder’s only “all-in” on time commitment. Set a signal that merit dictates reward, and nothing else. That makes everyone aware they have a shot at doing well if they put in the sweat.
- Stay humble Take a more humble stake of the equity if it contributes to the startups greater vision. If the business works out, you’ll have plenty, and if not, it wasn’t because you were too greedy at the start. Remember: you are on a mission to provide your customers as much value as you can. You are not on a quest to make more money than your team members. Align your actions with your values and goals. The financial reward will come.
I hope this guidance proves valuable. Splitting equity equitably equates (how’s that for a tongue twister) to more efficient business.
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