You and some co-venturers have come up with a business plan and an idea that you want to bring to fruition. How do you decide how much each person will own in the company?
Many entrepreneurs think that each founder should own equal shares. This can be problematic, for many reasons.
Here are a few things to think about when dividing ownership and founders stock.
- Who is bringing the funds to the table? Money is important and without initial funding, you can't get a business off the ground. But is the bank-roller entitled to a larger proportion of the shares? The decision will depend on how much money he or she is putting in and what his or her additional roles are in the company.
- Whose idea was it? There is some value to put on the original idea. But simply coming up with the idea shouldn't give majority ownership to the founder. Was the idea patented? A patented idea carries more tangible weight than an abstract idea.
- Who will be doing the lion's share of the work? Set agreements on day one for who will be contributing work. One person may be contributing valuable managerial labor while another one might be designing important elements.
- What are your business projections? This is an important question because it helps you figure out who is in the company for the long haul. Which brings us to the final point--
- Have vesting restrictions. Your stock agreements should have provisions stating that no founder can pull out stock in the company until the lapse of a certain period of time. The last thing you want is for someone to put in the minimal and cash out early at the same proportion as the founders who are toiling away daily.
Equity splitting between founders is very important and can be the source of much business litigation in the future. Remember that the startup equity sharing can also bring control issues and voting issues. You need to be careful who has control and who has voting rights in the company as well.
Also keep in mind that not everyone needs to be an "owner." You don't want too many cooks in the kitchen. See if any of the initial contributors can have a different role, perhaps as a key employee with a different class of stock ownership.
It's always wise to consult with a lawyer prior to starting a company.
- Dividing Equity Between Founders and Investors (Entrepreneur)
- Startup Founders: Should You Divide Equity Equally? (OnStartups)
- Legal Issues for Internet Start-Up Ventures (FindLaw Library)
- Small Business Law (FindLaw)