Splitting equity in a startup can be a sensitive topic. How much equity does each founder deserve? The answer to this question is usually different based on each founder’s perspective and, consequently, can be a cause of conflict. But, if you ask the right questions, it’s possible to divide equity in a way that feels fair and satisfactory to everyone.
Value addition should be the main criteria on which this decision is based, but value is not always straightforward. Asking the following questions will help you evaluate each co-founder’s overall value to the company.
- Whose idea was it? This is one of the first questions many co-founders focus on. Having the original idea for the business doesn’t always equate to deserving the majority of the equity, but the person who started the project does deserve recognition.
- What is each co-founder’s skillset? Each co-founder has different skills that deliver value to the business. Which skills are unique to each co-founder? The more someone provides skills or expertise that no one else on the team has, the more value they add.
- How much time is each co-founder investing? Founders working full-time deserve more equity than those that are only committed part-time. The equity split should reflect the increased risk and responsibilities assumed by full-time co-founders.
- How much capital is each co-founder investing? Co-founders who are bringing money to the table should be rewarded with equity depending on the amount of their contribution, the same way an outside investor would be.
- Who has industry expertise and connections? Founders with critical industry expertise or with connections to leaders, key vendors, and potential customers are extremely valuable, and therefore entitled to more equity.
- How important is each person’s role? Key roles in the business deserve more equity as they take on more responsibility for the success of the startup. So, the larger the leadership role, the larger the share of equity should be.
- What Intellectual Property is important to the company, and who is responsible for it? If a founder’s work can be patented, trademarked or copyrighted, these contributions should be rewarded with more equity.
- Does anyone have previous experience building a successful startup? If a co-founder has experience and know-how about the steps to follow for startup success, this is extremely valuable (and the equity split should show it).
If the equity split is divided in a fair way, the result will be a stronger foundation of trust with your co-founders, leading to a greater probability of a successful working relationship.
The above questions are just a few of the complex considerations for evaluating an equity split. For a more detailed, customised evaluation, try Linkilaw’s Startup Equity Calculator, a non-biased and automated tool to calculate equity splits between co-founders. Our calculator provides a transparent breakdown of your equity split, allowing co-founders to compare results and start an honest dialogue.
We hope this helps! If you still have questions and you’re unsure about the legal advice that you or your startup require, we offer a Free Legal Session where we’ll talk you through your needs and answer the questions you may have. Book a session here.