How to split equity in a fair and efficient way?

  • Eligibility: Identify people for the core team, and differentiate between key employees and non-key employees. A (future) Org Chart can help here.
  • Expectations: What are the individual goals. What functions are cofounders going to have and how much time are they planning to work?
  • Contributions: Are cofounders investing cash or contributing other resources, networks, or IP?
  • Importance: How important is their contribution to the success of your venture?
  • Roles & Responsibilities: Who is going to do what? Who will be the CEO?
  • Risk: What risk is everyone taking? What are the opportunity costs for everyone?
  • Motivation & Fairness: What feels fair to the people individually and overall to the team.
  • Investors: What impression would it make on investors? Is it comprehensible why you split the equity like that?
  • Before:
  • Pro: Simple to set up.
  • Con: Potentially tough negotiation and demotivated team members.
  • During:
  • Pro: No further activity is required (Milestones and Vesting should be in place).
  • Con: A change in the scope of work will not be reflected in share ownership.
  • After:
  • Pro: Clearly defined ownership percentage (assumed proper vesting was in place).
  • Con: Unjustified exit for cofounder (company valuation does not represent the fair value of contributions) or dead equity.
  • Before:
  • Pro: Clear rules and flexibility.
  • Con: More difficult to understand, not well established yet.
  • During:
  • Pro: Always clear valuation of contributions. Provides transparency.
  • Con: Effort to keep track of contributions. Events (e.g. incorporation) may trigger a fixed equity status and require additional considerations if bootstrapping continues.
  • After:
  • Pro: No negotiation about compensation of leaving cofounder, as the contributions are always valued.
  • Con: None that I am aware of, as the effort for keeping track of contributions is now paying off.

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