Startup companies have become more and more alluring to individuals interested in business. People nowadays would rather start their own company than enter a large and rigid corporation.
The UK is a perfect example of this kind of business culture becoming the desirable choice amongst other alternatives. The data compiled by technology entrepreneurs’ network Tech Nation and corporate intelligence firm Dealroom showed that UK had created more billion dollar tech companies than any other country besides the US and China.
However, while it’s relatively quick and easy to register a company, razing it to the ground is even easier.
Co-founder disagreements could mean life or death for a startup
CB Insights, a market intelligence platform, conducted a survey last year showing that the reasons for startup failures range from a lack of market need to being outcompeted in their industry. One of the most fatal issues that startups face is when the co-founders have disagreements between themselves. While a disagreement might seem like a minor issue, it can cost the company greatly or, in the worst cases, cause for a company to close shop altogether.
It can be said that a founder with a vision and strategy to make this a reality will result in a successful company. Logically then, you could assume that having two founders, co-founders, would be all the better. However, if you’ve found yourself having formed and registered a company before having fully known your co-founder, then you might have just set yourself up to be deceived.
Take for example the ArsDigita case: four co-founders could not agree amongst themselves and this resulted in the loss of millions of dollars and their market leadership position. Philip Greenspun, one of the co-founders, mentioned that the co-founders had stopped meeting during the year 2000. One could surmise that the lack of meetings to discuss important matters meant that they could not agree on anything, resulting in a loss of opportunities.
While each of these founders may have had great skill in individually running a company, the fact that they could not agree on a single vision and strategy for their company resulted in serious losses on their part. However, if one of these co-founders had significantly greater ownership over the company, things might have gone differently. This is where the matter of equity comes in.
The Importance of a Proper Equity Split
Equity is often informally defined as a co-founder’s commitment and dedication towards a certain company. While this definition is all well and good, this completely disregards an important factor about equity, the matter of ownership.
With higher equity, a co-founder receives a higher standard of control over company decisions. This is not to say that this co-founder should solely lead the company like some sort of dictatorship. This only means that the company vision will stay consistent and act as the constant goal everyone will be working towards. When it comes down to the very tail end of things, when a decision needs to be made, there will always be one and there will always be a specific strategy in place. For this reason, there is a great necessity in not only picking out the right co-founder for you but also in figuring out the appropriate amount of equity each co-founder should have.
This matter is something that needs to be discussed and decided upon based on the tasks and responsibilities they have within the company. There is no sure-fire way to decide this, and with so many factors to consider it might seem impossible to get the right split.
Luckily, Linkilaw’s startup equity calculator, Spliquity, provides a transparent breakdown of your equity split, allowing co-founders to compare results and start an honest dialogue. Try it here and don’t hesitate to get in touch to discuss your results or answer any other legal questions you have.