Divide Founders Stock Equally? Bad Idea
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
- 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
- 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
It's always wise to consult with a lawyer prior to starting a company.