How to split equity among co-founders

Posted on 3/19/2023, 4:43:50 PM

Starting a new business with co-founders can be both exciting and challenging. One of the most important decisions that co-founders need to make is how to split equity. Equity, or ownership in the company, is a critical component of any startup, and it's important to get it right from the beginning. In this article, we'll explore some tips and best practices for splitting equity among co-founders.

1. Start with a conversation

The first step in splitting equity among co-founders is to have an open and honest conversation about everyone's expectations and contributions. This conversation should cover a wide range of topics, including each co-founder's role in the business, their level of commitment, their skills and expertise, and their financial contributions. It's important to have a clear understanding of everyone's expectations and goals before making any decisions about equity.

2. Consider the value of each co-founder's contributions

Equity should be split based on each co-founder's contributions to the business. This includes not only financial contributions but also non-financial contributions such as time, skills, expertise, and connections. Some questions to consider when assessing the value of each co-founder's contributions include:

• How much time and effort has each co-founder put into the business?
• What skills and expertise does each co-founder bring to the table?
• What connections and networks does each co-founder have that could benefit the business?

By considering the value of each co-founder's contributions, you can ensure that equity is split fairly and in a way that reflects each co-founder's level of commitment and value to the business.

3. Create a vesting schedule

A vesting schedule is a timeline that determines when each co-founder's equity becomes fully vested, or fully owned by them. This is important because it ensures that co-founders who leave the business early don't walk away with a significant portion of the equity. A typical vesting schedule for co-founders is four years, with a one-year cliff. This means that after one year, each co-founder will have earned 25% of their equity, and the remaining 75% will vest monthly over the next three years.

4. Consider the future needs of the business

When splitting equity among co-founders, it's important to consider the future needs of the business. This includes not only the immediate needs but also the long-term growth and expansion plans. It's important to leave room for future funding rounds and the possibility of bringing on additional co-founders or employees. You don't want to give away too much equity in the beginning, only to find that you need to raise more money later and dilute everyone's ownership.

5. Get legal advice

Splitting equity among co-founders is a complex process, and it's important to get legal advice to ensure that everything is done correctly. A lawyer can help you draft a founders' agreement that outlines the terms of the equity split, including the vesting schedule, the roles and responsibilities of each co-founder, and the process for resolving disputes. A founders' agreement can also help prevent future conflicts by setting clear expectations from the beginning.

In conclusion, splitting equity among co-founders is a critical decision that should not be taken lightly. It's important to have an open and honest conversation about everyone's expectations and contributions, consider the value of each co-founder's contributions, create a vesting schedule, consider the future needs of the business, and get legal advice. By following these tips and best practices, you can ensure that equity is split fairly and in a way that reflects each co-founder's level of commitment and value to the business.

For more startup advice, book a call with leading entrepreneurs at mentordial.com. They can give you advice that can help you split equity among co-founders, deal with co-founder conflict, and more.