Equity split is one of the most important and controversial topics that you would need to discuss with your co-founder in the early stages of your business relationship. This is the moment where the arguments may arise. That’s why equity allocation and choosing the co-founders are very important.
How should equity be split between co-founders?
Going into business with someone is a little like getting married. So don’t go in blindly. Make sure your co-founder is someone you really see yourself working with in the long term and you are on the same page on what you can and cannot expect from one another. Also, make sure you do actually work together for some time before you actually give away equity, in Linkilaw we strongly recommend share vesting for this as I’ll explain later.
It is essential to set all obligations from the start to create a stronger foundation of trust with your co-founders and lead to a greater probability of a successful working relationship.
However, before getting lawyers involved on the question of equity split, it will be beneficial to discuss your expectations between the two of you to help you both get the best deal, but also to understand one another and what you are most looking to get out of the venture. Ask your co-founder, what is really important to him?
- Is the title of co-founder important?
- Is being a share owner important?
- Is simply working in a startup important to him/her?
- Is having a particular role most important?
- Is the most important to create a great business?
So, how much equity should you give away?
There is no absolute rule on this. Factors that will influence a co-founder’s value in a startup generally are:
- Co-Founder skillset (and whether it is complementary to yours)
- Co-Founder’s experience
- What co-founder is giving up to be part of your startup
- Whether co-founder is bringing any money to the table
- What the role and responsibilities of the co-founder will be
- Whether the co-founder has exited or built any successful startups previously
- Whether co-founder has access to investors
- Whether co-founder has contacts in the industry
- Whether co-founder is interested in the particular sector/has experience in it
To help you with this considerations, in Linkilaw we have created Spliquity, our Startup Equity Calculator, that provides a transparent and unbiased breakdown of your equity split, allowing co-founders to compare results and start an honest dialogue.
Once you’ve discussed this, you can bring a bullet-point arrangement to your lawyer that will be a great base for drafting the actual contract. A good shareholders’ agreement generally covers the following:
- Shareholder names
- Shareholder respective equity holdings
- Class of shares
- Share vesting (if any)
- Rights and obligations of the shareholders
- Voting rights
- Drag along and tag along
If you do decide to give away equity, learn that you cannot get it back so make sure you give away equity under a vesting schedule, with a cliff period.
A vesting clause is basically a clause that enable you to give away a certain amount of shares over time, rather than all at once. If your partner leaves or is fired during that period, the remaining shares will come back to you and so this is a good safeguard to ensure that you are happy with whomever you are working with.
A cliff period means that during that period, no shares are owned by the person. For example, under a 4 year vest with a 1 year cliff – if the co-founder leaves or you fire them within the first year, they wouldn’t get any equity.
Based on your equity split, you can start looking for a lawyer who can give you a final legal advice and draft shareholders agreement. We recommend you to download here your equity split report in a PDF file based on Linkilaw Startup Equity Calculator, Spliquity, and use it as a reference with your lawyer or you can also book a free legal session with us.