Startup Owners – This Is How to Split Your Business’ Equity
There is a phenomenon that appears every time a startup becomes profitable after a period of development – the battle for equity.
What happens is that everyone who contributed to the development process, regardless of the amount of work, money or personal connections utilized, starts trying to get a piece of the newly successful company. And some of them really deserve a solid share for their contributions. But how much should they get? Well, that is up to you. You need to split the equity fairly to everyone who contributed, but at the same time, do it in a way that will help your startup business flourish in the long-term.
This process is almost never easy, especially if you had a larger team working on the project. You simply will not be able of making everyone happy. People will overestimate the value of their contributions, try to downplay what others did, and will bring up personal friendships and how long they have been working with you on the startup. You have to go through all of that and try to appease them. We have some tips for that.
Reward the hard workers first
While those that simply gave you money sure did help a lot, you should always try to reward those who worked the most trying to get your startup rolling. These ones are most likely going to be the ones to put in that work in the future, eventually far outweighing the numbers that cash contributors brought in. However, keep their desires for the future reference in mind. Even if someone did work a lot and they do not plan to continue doing so, take that into consideration.
Put reason before your emotions
You are (as the founder) most probably connected to the person you started the company with. You could be close friends, family members, or even colleagues from your previous job. As such, you will have a reasonable desire to reward that friendship during the equity splitting process. Do not. If they did bring in the work to deserve it, great. Go ahead give them a large chunk of the company.
However, if you simply want to give them a bigger cut simply because you do not want to insult them or lose them as friends, you should probably reconsider. As great as building a company with your childhood friend can sound, you should put the startup in front of your emotions at the moment when you are starting to “take off.”
Determine the value of the original concept
If the idea you based your startup on was not yours, you would reasonably want to reward the person who had it, and that is great. However, do not put too much value on it. As we already said, hard work should be valued more than the concept. To be fair, the person who had the original idea is commonly the person who puts in the most work and should be rewarded as such. All we are saying is that you should avoid giving half of the startup to someone if all they did was provide the idea.
Do not try to do everything manually
Some tools can save you a lot of time, sweat, and nerves by streamlining the process. Excel is a great program we are all grateful for. However, you would be foolish to not utilize all the resources at your disposal.
Do not rush
This process takes time, and it is completely understandable if you want to get it over with as soon as possible, but it is not that simple. Try listening to everyone included, review everything and split accordingly. You don’t want to mess up here. If you miscalculate by a tenth of a percentage, the difference in the payout can eventually be worth tens of thousands of dollars.
Vesting is really important. Keeping all the shares, at this point in time, when you and your team are vigorous it does not seem like a big deal, but you do not want another founder to pack their stuff and leave the company while still owning a big part of it. That is simply bad for the business. How you do it, it is up to you, but we would recommend consulting an expert.
As a conclusion, we would just like to recap that, while splitting equity is not easy by any means, it is incredibly important for the future of your company. Follow the tips we have given you, and at least, your job will be a bit easier.
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