Equity

equal split of equity among 4 co founders, is it bad or good ?

Jyotirmoy Sundi

September 28th, 2016

Hi Sir/Madam, 
             We are a team of 4 co founders, all equally important and bring in enormous value to the entire product in their own ways. Will it be difficult for us to raise funding for equal splits of equity that we have now. What are some of the ways we can avoid equal split based on performance on 6 months from now ? We are having a hard time defining equity splits among us although we are pacing fast with the product that we are building but hearing different stories from folks based on even split, is it going to be a problem i future ? 

Thanks

More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Nofyah Shem Tov

September 28th, 2016

Hi,
I am a Founder who started by myself and I'm now adding partners. I suggest you read a lot on the subject before dividing anything. http://qz.com/309042/a-better-formula-for-calculating-startup-equity/

I suggest these handy tools for calculating who should get what: www.foundrs.com
http://foundersolutions.com/founder_equity_solution


to help you understand dilution:
http://ownyourventure.com/equitySim.html


Best of luck!

Nofyah Shem Tov


Renan Prado Head of Sales and Business Development at Novidá

September 28th, 2016

Hi Jyotirmoy,

This is a very important definition for the future success of a startup and you need to consider some points as: do you the intention to receive capital from VCs? I'm asking you this, because if your intention is to run a lifestyle business you don't need to worry so much about this. But normally, a equal split is complicated and the most entrepreneurs and VCs avoid. There is a website that can help you to simulate a better split of equity based on the real contribution: foundrs.com 

Rod Abbamonte Co Founder at STARTREK / @startupHunter / @startupWay / @CoFounderFound / @GOcapital / @startupClub / @lastminute

September 28th, 2016

Jyotirmoy, there are not an correct answer a priori. Depende of how much each co founder invests in knowledge, time and cash but at the end the most important is how much comfortable each founder can feel with your equities

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

September 29th, 2016

I've not seen where equal allocations to founders have concerned investors, as such. Knowing that the key execs have the right incentives post-investment (and post-dilution), on the other hand, is a genuine concern.

If roles and importance change over time, those "more important" can be rewarded with added equity, directly or via options.

It's also possible for equal equity shares to vest by different criteria, if objective milestones can be identified. Not easy, because everyone relies on the team, but perhaps worth considering.

Tom DiClemente Management Consulting | Interim CEO/COO | Coach

September 29th, 2016

Hi Jyotirmoy,

Before considering what investors may think, which may or may not be relevant, consider how you will operate up to the time of outside investment and ownership. It is always wise to avoid 50-50 splits and splitting equally among four also allows deadlock when an important decision can only be made by a vote. 

Someone is probably the leader and providing for one person to cast a deciding vote in the event of a deadlock among the four partners is wise when you want to run fast.

But even more, setting the proportions at too early a stage can cause a host of problems later on. Consider that you can apportion only a small amount of the shares you've considered and put most of each person's equity in as either forfeitable shares or options yet to vest. In this way, each person can have precise goals that need to be met to achieve their monthly vesting. Those that contribute receive their intended shares. Those that do not, do not. Of course, you need to be fair in such a system. It requires open communications. Always warn those who are falling behind and give them a chance to recover before deciding not to invest a portion.

You can also have buyback provisions, and they do work much of the time, but I've found that these disincentivize many good contributors. 

I've founded nine companies and advised and/or invested in scores more. I've seen many of those companies hastily set up and shares apportioned too early. The type of system above, where shares are possible to be forfeited from the beginning in an agreed upon and open way, has always worked for me.

Thanks, Tom