Starting a business with friends or family can be more difficult than it seems at first. Most people think: why not? We’re going to make money and have fun at the same time. But you need to be very cautious when mixing personal feelings and business, as there are a lot of things to consider, especially when splitting equity.
Why avoid mixing personal feelings when splitting equity?
Studies show that co founders who are friends or relatives tend to split their equity equally. This can be dangerous, not only because having a 50/50 equity split may easily provoke a deadlock situation, but because equity split should be based on a combination of the highest-valued contribution and the largest undertaking of risk.
The problem is that equal doesn’t mean fair. Usually, co-founders that know each other for a long time think that they know everything about each other, so there is nothing to discover. But a business relationship is very different from personal relationship, where people tend to act differently. In the long term, a co-founder can start to think that they deserve more because of their contribution, creating conflicts down the road. Unfortunately, this is something that people don’t want to talk about—thinking about the future of the company in serious terms and considering the negative scenarios that can happen if their co-founder relationship flops.
It’s important to have a serious discussion about the contributions and expectations of each co-founder, and to split equity according to those expectations. Once the decision is done, it’s crucial to make sure you get some basic documentation in place to avoid any future ambiguities. That way you have the added comfort of knowing that you have formalised your business relationship in black and white.
If you’re not sure how to start the equity split conversation with your co-founder, we recommend trying Spliquity, our automated, non-biased startup equity calculator. In less than 5 minutes, Spliquity provides a transparent breakdown of your suggested equity split, allowing co-founders to compare results and start an honest dialogue.
If you have any doubts regarding this question or other issues regarding the legal aspects of the startup journey, don’t hesitate to get in touch. You can also book a legal session with Linkilaw to discuss your results or answer any other legal questions you have.