Navigating Equity Split Among Business Partners
Everyone wants a piece of the pie, don’t they?
When there is a good idea at stake, everyone will want to be included. The question, then, about how to divide equity can become a crucial one.
Asking the Question
Deciding how to divide equity can make or break a business. OK, maybe it isn’t that drastic when you’re starting out, but eventually someone is going to start asking the difficult questions. If you’re not ready to broach or cover this “prickly” topic, you won’t be setting yourself or your small business up for success.
Decoding Equity
What exactly is equity anyway?
Equity comes down to your small business assets and your small business debts. What you have versus what you owe. Equity is what you own as a small business owner. Your ownership. Your worth.
For small business owners, equity is a term that should be carefully understood and considered, especially when there is more than one person at the helm of a business.
To spell it out even further, for a business, equity is the sum of earnings, inventory, and other assets minus overhead, loans, and other forms of liabilities.
Having the “Personal” Conversations
When a company or small business has more than one founder, the conversation swirling around the topic of equity and who gets what can get...personal.
When co-founders who start off as BFFs hatch a small business out of a shared idea, this topic can become an even more “prickly” topic. Why? Because everyone is expecting a payout and deciding who gets what can be a different kind of realization.
Whoever had the idea for the business or whoever is going to be doing most of the work, this individual should be the owner of the majority of business. Often, a collection of founders and collaborators can feel like too many cooks in the kitchen. Too much ownership and too much of shared control can create a confusion of power that may make for a mess later on down the line.
Splitting as Founders
What about this scenario: Two founders begin a small business with an idea that trumps the latest and the greatest. An idea that could truly shake up the current market strategies. How should they share their equity?
A 50/50 cut? An even split right down the middle?
Sounds about right, correct?
Wrong.
When two founders start making 50/50 shares, the entire game plan becomes black and white. They easily forget about that gray area that makes up everyday life.
Instead, two founders of a small business should settle in and assign value to what each person brings to the table. This is the best way to create a system based on fairness.
Simple questions business partners might consider during this conversation:
Who had the idea?
Who worked on the execution of the idea?
Who is creating the business plan?
Who has web site experience?
Who will raise capital?
Who is working full-time on the business?
Do either of you have previous startup success that could make it easier to accomplish certain early goals for the small business?
What is your expertise?
What is my expertise?
Save Some For Later
Peter Ziebleman, a lecturer at the Stanford Graduate School of Business, suggests that for early-stage companies and small businesses, determining an appropriate split of equity can be a “make-it-or-break-it moment.” Starting this possibly charged conversation can set the tone for how co-leaders will continue their more difficult conversations further down the road.
Ziebleman suggests having certain “safeguard” practices in place to provide a context for negotiation. He encourages teams of co-founders to hold off on allocating all of the funds amongst the founding members.
If 75% of the company is being divided between three partners, co-founders, etc., instead of giving 25% to each co-founder, begin by sharing 20%. Later, offer that remaining 15% to those individuals who are still committed, following through, and showing up for day-to-day business. Those who stick around will be the ones to reap the benefits of the small business success.
Debating Titles
When it comes to determining the worth related to a certain individual, small business masterminds can look towards which title the individual most embodies. Incorporating roles and duties that best suit a co-founder’s personality can determine tasks, which in turn can help determine worth.
Time + Effort
When individuals working as co-founders are pouring their heart and soul (and every waking hour) into getting a small business off the ground, the effort can seem to be relatively equal. Along the way, though, as the first of many speed bumps are encountered, the energy and dedication may shift. Take these shifts in energy and behavior into consideration.
Structuring the Splitting
Structuring considerations should take into account how the company would move forward should any number of things happen. Airing out these realities (no matter how ghastly or dramatic) and planning for them, aren’t necessarily uncomfortable conversations. They’re conversations that allow a reality to unfold that isn’t bogged down with resentment, lawsuits, emotions, or big egos coming into play.