Joint business: How to structure equity split
Starting a business is exciting especially if you’re doing it with a good friend, a former colleague, or even a family member.
Getting lost in all that excitement, it is easy to forget to talk about the important stuff like how to split equity among co-founders. Following are a number of critical factors to consider:
Role of co-founders
What will be the role of the co-founder(s)? Which aspects of the business will they be solely responsible for? Ideally, co-founders should have complementary skills for the sake of the startup. Each founder should clearly define what his contribution is. A detailed job description should be drawn up for each co-founder.
Who is working full-time?
Not all co-founders will work full-time on the startup. If there is a full time and part time co-founder, the part-time founder should naturally get less equity because he/she is taking less risk and at the same time provisioning less value and commitment. But, the equity split shouldn’t be used as a carrot on a stick, but rather as a tool to create good morale for the people involved in the startup.
Who brought the idea?
Although, the idea is the reason the business exists in the first place, some school of thought are of the opinion that whoever executes on the idea should get a higher equity than who brought the idea. However, this decision is up to you and your co-founders.
This still boils down to execution. Who will do the majority of the work? Building the MVPs can be time-consuming, so whichever co-founder(s) responsible for this task should definitely get some equity consideration.
If the startup requires high tech innovation to launch products and one of the co-founders is an experienced engineer, then more equity might be expected. The needs of the company can change over time (so in 5 years, the engineer’s services might not exactly be required.) Try not to disrupt the equity split too much over a particular skill; there might be other needed skills along the line.
*Courtesy: DIY Law
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