If you started your company with a cofounder, one question that may trip you up is how to split the equity between you. This can be an awkward subject to broach, even if you and your business partner have known each other for years. After all, suggesting that you “deserve” more than your partner is bound to cause hurt feelings, and may offer up a 50-50 split just to avoid any uncomfortable conversations.
But it’s important to resist the temptation to “play nice.” Think of the equity split discussion as your first real test as an entrepreneur – because in many ways, it is. It’s important not just that you look out for your own best interests, but that you structure your company in a way that works for the long haul.
The best way to approach this conversation is to take emotion out of it, to the extent possible. Here are some tips on how to structure your equity in a way that makes sense:
– Don’t split your equity 50-50. It’s almost never a good idea for two cofounders to split their ownership equally. Leaving aside the fact that their contributions typically aren’t equal, a 50-50 split leaves open the near-certainty that you’ll disagree on a major business decision, leading to a deadlock and no way to resolve the issue. For this reason, even with all other factors being equal, it’s important that one partner serve as the “decision maker” – the one who can essentially override his or her partner’s objections and make a decision on behalf of the company. The split can be 60/40 or even 51-49 – as long as someone has the power to override the other’s veto.
– Consider what each of you is bringing to the table. Did one partner found the company, then recruit the other to join? Does one founder have significant experience or connections in the field? Is one of you putting in a significant amount of capital, while the other is contributing mostly (or entirely) sweat equity? The partner that brings any of these assets to the table is, in most situations, entitled to a bigger equity share than his or her cofounder.
– How much time will each of you spend working on the business? Many cofounders go into a venture with good intentions, only to quickly discover that one of them is much more committed to the company than the other. One partner will work 70 or 80 hours a week building the product, identifying an audience, raising capital, and putting together a marketing plan, while the other keeps his day job and puts in maybe 20 hours at night and on weekends. This is a recipe for disaster, unless you can agree upfront to an equity split that reflects the vast disparity in the partners’ commitment to the company.
– Don’t forget to vest. Whatever you do, it’s almost always a good idea to put the founders’ equity on a vesting schedule. This means that the partners earn their equity over a period of time (usually 3 or 4 years), rather than getting it all upfront. This is crucially important, as it prevents either of the partners from spending a few months on the project, then walking away owning a significant chunk of the company.
Be sure to approach this topic with an open line of communication, and to the extent you can, put emotions aside. Determining the best equity structure will make for smoother sailing – and your company will be better off for it.