There’s nothing simple about launching a startup, not even the basic detail like splitting the equity. Although 90% of new companies fail, the fact remains that the average successful startup raises $41 million across four rounds of financing, exiting around $240 million.
We are talking about serious figures here, so it’s not the same whether you split the equity fairly or use an alternative distribution method. As a matter of fact, it turns out that splitting the equity equally often ends up being the worst solution possible.
Now, the key question is: How can we do it properly? Here are a few practical tips on how to split the startup equity the right way.
What Is Startup Equity?
If you are new in business, you might find it difficult to understand all those buzzwords and business jargon, so we want to help you figure out the key concept instantly.
What is startup equity? In short, having equity in a company means that you have a stake in the business you’re helping to build and grow. If the startup proves to be profitable, you and your teammates will understand the importance of a proper equity split.
Many successful companies failed simply because their founders argued over equity ownership, which is why you ought to avoid the same problem. You can do it by following the steps described in the next chapter.
5 Ways to Split Startup Equity
The way you split startup equity depends on the peculiarities of the business and the level of understanding among founders. The only thing that really matters is to make logical and data-driven decisions because too many startup creators rely on sheer guts and optimism. But instead of being irrational, you should follow these five rules when splitting startup equity.
- Avoid even equity distribution
The first thing you need to learn is not to use the principle of fair or even equity distribution. Why not? The reason is simple – not every member of the startup is able to give the same level of contribution to the project.
Think about academic writing services such as Assignment Geek or Australian Assignment Help as an example. They employ the best content creators out there, but some writers still perform better than the others. The same logic applies to startups, so do your best to avoid even distribution.
- Begin with difficult conversations
Another important tip is to begin with difficult conversations immediately. Don’t enter the game unprepared and let the storm surprise you when it’s too late to make a good deal. The only good option is to consult with other co-founders of the startup and determine who deserves which portion of the share. It will probably be unpleasant, but that’s the way it is with equity splits.
- Understand the value of every founder
Rule number three is closely related to the previous tip on our list. Namely, you all need to analyze and determine the real value of each founder based on a set of parameters. These factors include the following:
- Idea: Who came up with the business idea?
- Leadership: The most important positions deserve the largest share of the equity.
- The effort invested: Some startup founders work more than others and you should acknowledge that, too.
- Personal capital investment: In case certain founders invested their own capital in the project, they should be given more equity.
- Industry expertise: Is there a person in your team that possesses all the project-related knowledge? If yes, he/she deserves a bonus share of startup equity.
- Intellectual property: If you own a patent or trademarks relevant to the project, you deserve an additional portion of equity.
- Use a tool to calculate properly
The year is 2020 and you can find a lot of digital apps to help you with equity calculations. One of our favorite platforms is the Startup Equity Calculator, a tool that simplifies the process and makes it easier to determine the most appropriate split format. All you need to do is answer 15 questions such as:
- Who is the CEO?
- Who had the original idea?
- Which founders are working part-time and while full-time?
- Who pitches investors?
- Who comes up with most of the features?
If you answer all the questions honestly and accurately, the Startup Equity Calculator will show you the way to go with your project.
- Define what happens if a founder wants to leave early
With everything we’ve stated so far, you should have the basic notion of how to split startup equity. But the job is not done yet as you still need to define what happens if a founder wants to leave the project early.
You need to agree on market vesting terms in order to maximize founder engagement in the long run. In case one of you decided to quit, his/her stake in the startup is going to shrink. Every member of the team should be aware of that well in advance.
Up to You
Splitting the startup equity is not exactly rocket science, but it still forces the founders to use a more complex methodology than the simple “let’s do it fairly.” You need to think about a broad scope of details to determine the right level of contribution of each member of the team, a task that requires a lot of strategic thinking and a few awkward discussions.
In this post, we showed you crucial tips on how to split the startup equity the right way. Remember our suggestions and don’t enter the equity splitting unprepared – it will cause some serious problems later on and jeopardize the functioning of the entire company.
Tobias Foster is a resume help expert and one of the best professional essay writers. Tobias offers his clients help with dissertations, but he is also a passionate business analyst. Tobias is the father of two toddlers and a long-distance runner.