“Dreams don’t work unless you do.”
I believe that the startup organisation is one of the most significant forms to make the world a better place. If you take a group of people with the right equity incentives and organise them in a startup, you can unlock human potential in a way never before possible.
Often, co-founders of a startup decide just to have a quick, even split of equity to save any hassles or to put aside this discussion entirely. But the question is, should one do an even split among the co-founders? Maybe depending on the conditions but more often than not, the answer is NO.
If there are multiple founders, one of the common mistakes is when they’re issuing the equity to themselves to divide up among the founders. They give too much credit for what got them there and not enough credit for what needs to be done in the future to make the company come forward and reach its potential. Questions like who’s going to be running the company over the next several years? What role will each of the founder have? And how much of the burden is going to be on each one versus the CEO?
In no way, it means that the part one founder has played is less critical but looking at harsh realities and facing them. All founders are not equal, and the person who’s a CEO at some point is probably working hundred-hour weeks. As a company grows, it will demand a CEO’s position as someone has to take charge and the person who has the preponderance of the burden to carry is at some point is going to feel resentful that all the founders have been an equal share of the business.
Thus the principal founder or the CEO should get a disproportionate share as at some point. In the future, that’s what is going to save the person and provide that extra incentive to work hard and keep one motivated enough to continue to carry on the business.
Another point that comes to notice is that not all founders stay some leave forever in six months, some in four years. The person in charge will still carry on the business, and the person that you gave that equity to is long gone but is benefiting from all of your hard work and is very appreciative.
The social contract among founders needs to be articulated which is that you’re in it for the long haul and somebody who was there for six months or a year shouldn’t be able to keep all the equity that they are initially given.
If they leave or there should be some additional equity grants to the founders who stick around. But since it turns out those other grants to founder stick around is hard to get. So one of the smart things to do is instead of raising money through another issue but instead impose some vesting so that if somebody walks out the door, you have the power to take some of that stock back.
It is essential because you’re either going to work harder to fill the gap or hire somebody else in and give them equity. If you don’t take some stock back from the person who left, you need to dilute everybody to bring to provide new stake.
One can get a quick assessment of what their equity should be like or in which category they find themselves in.
The Idea Generator
The idea is like an engine to a car without which the vehicle won’t be able to start. They are the rightful owner of the idea. The person who came up with the main value proposition deserves due credit and benefit for that.
The Guru
Now experience is more like your cars steering wheel. Which means that your car can work without steering wheel but will most likely end up have an accident without it. The experience becomes crucial as that person can guide and consult you in the bottleneck decisions. They act as your mentors as they have had prior experience in running a business.
The Handy-Dandy-Man
The skills are like your tiers to the car. The engine can run, the steering can steer, but it can’t move without the wheels or the tiers. Think of it like this each tire represents a crucial skill your company may need it could be related to finance or maybe technical work depending on your business. And those people with individual skills are a must for your business to run. Thus they too should be somewhat incentivised as every power is needed. But sometimes one is often more required than others.
The Multi-Tasker
Responsibilities are like car maintenance. Are the tiers working correctly? Is there enough fuel in the car to go a long-distance? What else is needed to be done so that the organisation can prosper? In the beginning, every founder will have more on their plate than they can handle which will include different responsibilities in addition to one’s previous roles in the startup which will be the task one is in charge.
The Long Haul
Commitment Risk is like fuel to your car. The moment you stop being committed to the work, the car stops. More the commitment, the more the vehicle can run. There is a shared risk of starting a venture. Just one founder might be giving up greater freedom and opportunities than the others.
Equity division tools might be a fair way to split up the equity such as by using foundrs.com and gust while an attorney as an experienced professional might take up certain factors into consideration that might go unnoticed; it is all up to your choice.
Now everyone had played an essential role in the making of your organisation where it is and should be incentivised to continue doing so. The main question that one should answer based on which equity should be given is what will be bringing to the table in the future. Lastly, it is essential that you and all your partners answer yourselves a straightforward question- ARE YOU IN IT FOR THE LONG HAUL?
*Everyone has put in the time, commitment and all want to be somewhat incentivised. It is highly advisable to contact an attorney before finalising the equity split agreement.
