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Founders Equity 101

Founders usually give up equity to raise funding and attract talent. Since most founders work for equity, in cash restricted startups, establishing equity ownership is the first step in collectively agreeing on what each owner’s commitments are and laying a plan to building a self-sustaining business.

This simple guide hones in on the steps in deciding equity ownership between founders in your startup venture. Cementing the equity split between startup founders is an opportunity for everyone to think through what each founder brings to the table and calculating a split that everyone understands and is agreeable.

When formulating your Founders Equity Mechanism — act on the following steps:

Decide Early

The sooner that your startup formulates your Founders Equity, the sooner that you all collectively can focus on building the product and validating your idea in the market.

Take the Founders Test

Measure each potential founder in qualitative and quantitative categories using a balanced scorecard. Founders that pass the test can feel confident that they are deserving of equity.

2016 1x1 Media
2016 1x1 Media
2016 1x1 Media

Be Fair above all things

When things get hard, and they WILL get hard - feelings that were not projected before might begin to surface - adding more complexities to achieving your startup’s core priorities.

One of the first things that can be mitigated are feelings of unfairness. Be fair, thoughtful and very clear in how each founder’s split is being calculated.

Develop a vesting schedule

Once the amount each founder will receive is determined, set up a vesting mechanism that establishes how founders will earn their shares.

Founders don’t own their shares until the stock vests, either through time-based vesting, milestone-based, or a hybrid schedule. Having a vesting mechanism is a great way to retain talent and motivate founders to achieve goals in building your company.

Set the Founder’s Equity Mechanism in Stone

Come to an agreement and put it in writing. There should not be a need to constantly reevaluate whether the Founder’s Equity is fair.

There are certain triggers of when Founder’s Equity needs to be revisited. Such as when adding a new co-founder, when formalizing your organization with a startup lawyer, and when inviting early stage investors.

It is best to work with your startup lawyer or CPA to review and put your Founders Equity Mechanism in writing.



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