Startup Equity Vesting: 3 Ways to Fairly Split & Calculate Equity Between Founders
Making sure that all founders of a startup are happy with the equity split is very important. It can take some time to figure out the right split as well as the equity that each founder holds in the company. However, it is also a very important part of the process. You do not want to leave any questions with this portion of the company because it can lead to some serious issues later. There are several ways you can split the equity between the founders in a way that is fair. Doing it the right way will keep all parties involved very happy throughout the course of the business.
Read these tips on startup equity vesting so you can learn how to allocate and calculate a fair equity split amongst founders in a startup. Be sure to share these tips with other founding team members!
#1 Splitting Equity Equally Amongst Founders
All founders get the same share
This is only a good idea if all founders are putting in the same amount of work and money into the venture. Unless this is occurring, it is best to stay away from this method. It may be the easiest to do but it is usually not the most fair way to do it. In the beginning, it may seem like the easy way to do it since there is almost no value with the new company but later on, it can cause a lot of issues because of the inequity. The reason behind this is if one person is putting in the majority of the work while two others are simply investing in the business, it may see a bit unfair later. This is not always the case and if you can determine that each founder is putting in the same amount of money as well as the same amount of time into the business, this can be a very smart, and easy, way of fairly dividing the equity.
#2 Equity Based On Capital
Founders Get Equity In Return For Their Money
With startup founder equity, sometimes the easiest way to fairly divide it would be based on how much capital they initially put into the business. If you want to divide the equity this way, you can easily use a startup equity calculator online to help you determine how much equity should go to each founder. If money is the only thing being considered in this formula, then it should be fairly simple. However, money is not usually the only thing to consider with a startup. Another big thing to take into consideration is the time that is put into growing the business from each founder. If someone simply gives you the idea and is another founder, but does not put any work into it, that can be very unfair later on down the line. If another simply brings in connections to grow the business and does not put a lot of time into growing the company, that is another thing that could leave founders unhappy later. These are all things to consider when dividing based on money alone.
#3 Equity Based On Time
Founders Get Equity Based On Their Role
This is another common way to divide equity between founders. If everyone is putting in the same time and commitment into the business, then the division is fairly simple. However, this is not usually the case. When dividing the equity this way, you will need to be clear with all of the founders what is expected of them throughout the course of the company. Once everyone knows their role and has agreed upon the terms of the equity division rates, then you can equally divide the equity based on the terms.
Combining All Three Equity Division Methods for Founders
Simplifying the complicated equity division
Often, the best way to divide the equity between founders is a mix of all three of these methods. You may have some founders who simply provide the capital and do not want to participate in the day to day activities of the venture. Others may want to do all of the work but not put forth any money. All of these are perfectly ok as long as it works for the company and you divide equity accordingly. Additionally, when all of these factors are part of the equation, it may be best to consult with private equity firms for assistance. They can also help prevent startup equity dilution so that you can continue to grow the company by bringing on new investors.
Remember this tip too: never create an equal number of shares or stock amongst founders. Example: 50/50 splits. These can create gridlock and could prevent your startup from growing!
Expert on startups and venture capital, Ross Blankenship, can provide more tips for you as you build your company.
Learn more about Startup Funding and Founder Equity!