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Splitting Equity? Here’s What You Need To Know

Splitting equity is an art and not science. One thing that should be kept in mind before splitting is – split the shares without giving away the company. You never know what your co-founder will do in a span of months whether he decides to walk away from the company and still retains the large portion of the company. It will be like giving the value of your hard work to a person who doesn’t contribute to your success. Some of the points are already discussed above; a few more important factors that need to be considered before splitting.

Don’t Let Emotions Overcome Your Intelligence

Our co-founders are generally our friends or family member to whom we have lot of attachment. We love them and, hence, we always get carried away by our emotions when it comes to any decisions related to them. Make sure, you don’t do this when it comes to splitting the equity. You have to think rationally outside your emotions. You have to put that extra effort to take that decision of equity split.

Vest All Shares

Vesting of shares means that the founder will have to earn the equity shares as per the criteria mentioned in the agreement. Furthermore, if you don’t have any agreement then get one. Irrespective of the divide, all the shares must be subject to vesting restriction. In India, vesting clause is not very common and hence people start the business merely on the faith that everything will go fine. But, it is always advisable to get things done on papers.

Focus Should Be On Value Addition

Value addition should always be the criteria on which every decision must be based. You don’t need to compensate the time, but you must compensate for value. Value should be rewarded always. In the startup era, we always reward ESOP-based on hard work. But, this shouldn’t be the criteria. Getting the thing done is far important than working hard. Hence, even if you are thinking of granting ESOPs to the employee, grant only if you see the skill that can add value to your startup.

Importance Of Co-Founder’s Role

The equity split must also be based on your role as key personnel must get the premium over the non-key personnel. You may also prepare a table like out of my 10% pool, % are for C grade employee and rest 2% for CTO/CEO/COO and 1% alone for the directors. You may prepare the table as per your wish.

Number Of Founders: Once the founder of Amazon said “If you can’t feed your team with two pizzas, then its too large.” rather I would say, if it comes to founders, don’t make it more than 3. Two or three founders are more than enough.

A List Of Pointers

Even if you are still confused, then you may use the following pointers and discuss between the founders and your team. Give proper attention to every pointer and decide the equity sum accordingly. Here is the list of pointers:

Who is the CEO?
Which founders are working full time? And which founders are working part-time?
Which founder absence will impact the chances of raising funding?
Which founder absence, will impact the marketing of the product?
Who comes up with most of the features?
Who can get the initial traction of the business?
Who is well connected with your target audience and market? Who know the industry culture, its behavior the most?

Practical Case Study

One of my clients reached out to me for advice on a situation which was a bit different. They were 3 founders and were considering adding another person as a co founder but they were confused about how much equity they should give to him. So I asked them few questions:

Me: Why you want him as a co founder?

Ans: Because we think that we need him to start our business.

Me: Why you need him to start? Is he having any particular niche that your company cannot run without him?

Ans: Not as such, but he is the only guy who is putting money into our business and we need money to start our business and hence we need him for the start.

Me: Is there anything else he is investing into the company apart from a lot of money?

Ans: No, we have the skill; we just need the money so he is taking care of it.

Me: I don’t think so that you should add him as a founder into your company. He is not the founder, he is the investor. You should know the basic fundamental difference between the founder and investor. He is only investing money and he is into your business. He doesn’t bring any value addition to the company. Founders are the people that add value to the business and without them you cannot start your business. Here money is not the niche you should look for considering any person for the job of founder. Hence, I would say include him as an investor and not as a founder.

Conclusion

Only you can value the importance of equity in your startup. These decisions shouldn’t be taken in a hurry. Be patient and apply your brains to the situation, consider all the valid points and divide the equity in such a way that everybody is satisfied with the divide and a solid base is formed.

Read More : Inc42