Division of Equity
The following post is from Jake Cho ’17, a Butler Venture Accelerator team member.
How would you divide equity amongst founders?
As part of Babson’s Global Entrepreneurship Week, Professor Les Charm held an interactive workshop for Butler Venture Accelerator participants on what to think about when dividing equity amongst founders.
In groups of five, each participant held a specific position as a potential founder of a new company. Participants discussed about their rights to equity as CEO, advisor, scientists and fellow in able to earn their portion of equity. This activity was new to participants as most of them have not divided equity in a start-up before and they realized dividing up equity is not so simple.
It is difficult and also can be awkward to divide up the equity as founders of company. Professor Les Charm talked about some possible criteria and items to think about that can help naïve entrepreneurs to divide equity in a “fair” manner. Some possible criteria include:
- Past Contributions
- The Market
- Future Contributions
- Negotiation for its own sake
Professor Les Charm suggested to think about the 4 D’s when dividing equity:
- Decision: How is the decision made? Which decision is made by whom? Does the CEO make the decision or all or some founders voting? If founders are voting to make decisions, is the voting power same or different from the equity?
- Divorce: There are 3 kinds of divorce.
1. Founder leaving the company: How is the equity handled when a founder leaves the company?
2. Founder being forced to leave the company: How is the equity handled when a founder leaves the company?
3. Founder having divorce with spouse: Equity may be part of alimony. Possible influence on founder emotionally and physically.
- Death: How to deal with equity when one founder dies.
- Dissolution: How assets of company is redistributed if company is brought to an end. When you get traction, embrace it. Sometimes it means letting go of early employees.
In addition to 4 D’s, Prof. Les Charm discussed other items to think about when dividing equity:
- Vesting schedule for founders
- Number of founders which produce highest success
- Who is on the board
- Separate ownership and votes
Professor Les Charm highly recommended to build a board when starting a business. “If you are thinking about starting a company, build your board immediately!”
The division of equity workshop got future entrepreneurs to start thinking about and realizing the complexity of this process. Professor Les Charm says there is no right answer to dividing equity. However, entrepreneurs should be aware of some possible criteria and items to think about when dividing equity amongst founders.