Division of Equity
The ownership of a company depends on equity. The amount of equity you have reflects how much ownership you have the company. Every percentage counts. Most entrepreneurs unfortunately do not know how to distribute equity among founders. Professor Les Charm facilitated a group workshop for the Butler Venture Accelerator to give participants an idea of how to divide equity.
After going through a scenario, Professor Charm highlighted there are certain criteria to consider for dividing equity among founders.
- Past contributions of the business partners
- What is typical for the market? How do others normally divide equity?
- Future contributions of the business partners towards the business
- Who is taking how much risk?
- What kind of culture do partners want within the company?
- Negotiation for its own sake, negotiate with each other just so you can understand what your business partners are thinking.
In addition to the possible criteria, Professor Charm highlighted that there are 4 D’s to consider as well.
- Decision: how are things going to be divided? Who is going to have the final say? Is it the CEO, the board of directors, or the co-founders?
- Divorce: How will the business be broken up in the case of a dispute? If the co-founders want one co-founder to leave, what will be the process of firing the co-founder? What will happen is one of the co-founders asks to leave?
- Death: What happens when one of the co-founders/stakeholders dies? Will the family be allowed to own the equity or will the equity be given to the person who is hired in the position?
- Dissolving the company: How will the equity be divided among the holders if the company is dissolved?
Division of equity is not a simple activity as it involves multiple criteria that cannot simply be quantified. It might take time to consider how to divide equity, but it is important to have that open conversation with your founders. The arrangement should be mutually beneficial for all. Remember to take into consideration these criteria when you have that kitchen table conversation.