Startups are the future of the business world. And it’s not surprising if you look at the success of some startups like Amazon and Google. Naturally, startups attract quite a lot of talent due to their potential. But there’s a problem too. When you have so many talented and competent people under one roof, you must figure out how to divide equity.
Keep in mind that big companies and organizations offer their employees big paychecks to entice them. But startups don’t have that option. They lure their employees by sharing company ownership. But when too many people are involved, dividing equity can become pretty challenging.
How to Divide Equity and Its Importance
Before we talk about the division of equity, you have to be clear about what the terms entail. Equity is basically non-cash compensation wherein individuals in a company get partial ownership. Usually, the equity is divided among early founders, employees who join the startup in the initial days, and of course, financial supporters.
Let’s not forget that the founders of startups want the best talent to become a part of their team. Hence, they give a small share of company ownership to these employees. It’s basically compensation for taking the risk of working in a startup not yet established. A good example of this is Instagram, where 13 employees got a 10% equity stake in the company.
What to Consider While Dividing Equity?
You have decided to split equity to attract talent. But what would be the fair way to do it? This can actually be pretty overwhelming. However, if you want to divide equity fairly, there are quite a lot of factors you have to consider.
Conceptualization of Startup
Naturally, the person who developed the startup idea and played a key role in its ideation deserves the largest equity share. However, sometimes it’s not that simple. A lot of startups have more than one founder. So how to divide equity in this situation?
A fair way to divide equity in such cases is by assessing the contribution to the startup by each. What’s the contribution of each founder in early development? You can take Instagram as an example. It has two founders, but the one with technological innovation has more stake.
The Stage of Startup
How much equity share an individual should get depends on what stage he joined the company. Naturally, co-founders and employees who have been a part of it since the early stages deserve a larger piece. After all, they should be adequately compensated for their risks and efforts.
When It Works as a Salary Replacement
If you divide equity to give some employees a share of the company as a salary replacement, you have to decide the share depending on the number of employees involved.
Remember, you are using this equity share as an enticement for the top talent. Therefore, you have to ensure that they feel they are being adequately compensated.
Financial Investment
The contribution of each team member has to be considered while dividing equity. Usually, the person with more investment in the project gets more shares. However, you have to consider the past and future contributions too.
For instance, how much time did everyone spend pitching the business idea to potential investors? How did each team member contribute to the startup’s development? Which team member is more likely to be crucial for the future of the startup due to his professional expertise and experience?
The answer to these questions makes it easier to determine how to divide the equity and how many shares to give each person.
Time to Divide the Equity: How to Proceed
A lot of people feel equity should be divided equally among everyone involved. This seldom works out, and someone always ends up feeling resentful. After all, different people contribute to the startup to varying extents. And it doesn’t seem fair that someone who has undertaken a long and grueling journey gets the same share as someone who has just joined the company. Here’s what you should do.
Decide on the Method for Equity Split
Instead of a single person dictating the rules, it’s advisable for everyone to have a say in this matter. Once you select the method to divide equity, you must make it clear to all the involved parties. Ensure that everyone understands the process well and agrees to it. This will ensure that there are no disagreements or resentments later.
Fairness is Key
Remember your startup is at a vulnerable stage currently. It won’t help if your team is resentful of how things are being done. So you must ensure you are fair while determining the split percentage.
Think About Protecting Yourself
Yes, you have to give everyone their fair share of the equity. But don’t forget to protect your own self in generosity. If you have co-founded this startup, you have to consider the possibility that you might have to part ways in the future. Plan for the future and ensure that you protect your interests.
Equity Split: Realize the Importance
A lot of startups have had to close shops because their co-founders were unable to come to an agreement about their equity share. Remember, a failed startup can be a huge blow. Don’t let things come to this point, and make sure you prepare for the worst outcome. Learn how to divide equity so that no one’s disappointed.
