Figuring out how to split equity can be a sensitive topic, but it’s a hurdle that must be overcome if you have a co-founder in your new business.
Many founders put this off because it’s an uncomfortable conversation. But if you’re not comfortable talking about such important things with your co-founder, maybe it’s a signal that there are bigger problems in your working relationship.
The equity split matter is one of the first of many important topics that you will have to discuss with your co-founder. If it’s done in a fair way, you can create a more trusting relationship and set a foundation for honest, productive conversations.
When is the right time to discuss your equity split?
It’s essential to set all obligations from the start and in order to help you, in Linkilaw, we’ve created Spliquity, the Startup Equity Calculator, a non-biased and automated tool to calculate equity splits between co-founders, that provides a transparent breakdown of your equity split, allowing co-founders to compare results and start an honest dialogue.
However, before doing this make sure your co-founder is someone you really see yourself working with in the long term and that both of 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. 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.
If you’re finding difficult how to split equity or the legal agreements you need to put in place, book a consultation with our legal team and we’ll answer your questions!