Dividing Equity Among Founders
Charm started out with a scenario. There were five different characters working at a lab and each fighting for their equity. Each student became one of the characters and started discussing how much equity they deserved to have.
Professor Charm emphasized that there are some criteria for sharing the equity:
- the past contributions
- the market
- future contributions
- current money
Founders should remember that everyone is negotiating for their own sake.
There are four key items to think about when dividing equity. According to Professor Charm, they are called the four D’s:
- Decision: how are things going to be divided? Who is going to have the final say?
- Death: what happens when one of the co-founders/stakeholders dies?
- Divorce: how will the business be broken up in the case of dispute?
- Dissolution: how will the equity be divided among the shareholders if the company is dissolved?
Moreover, there are other things to think about such as vesting schedule for founders, number of founders which produce highest success, who is on the board and separate ownership and votes.
Professor Charm shared that there is no such thing as “fair” when it comes to splitting equity. Everyone always looks out for their best interest. One might think that since they are in the highest position, they deserve the highest equity. One may think that they deserve the highest equity because they have the most patents.
Professor Charm shared that in order to deal with this inevitable problem, it is best to talk about splitting the equity before the business even kicks off. The “kitchen table conversation” takes a long time, so if you have a new venture, have the conversation as early as possible.