Top 3 Things You Must Consider When Splitting The Startup Equity With Your Cofounders
by Sean A.
It can, and probably will, have a lasting effect on your life. If it isn’t fair, one or more people will be demotivated and possibly bitter about it. Both parties need to understand and respect that both have what the other needs. If it was a joint effort, then there is no doubt that equity should be split equally.
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One neat way of getting around this is by changing the percentage of options offered for however long the difference in commitment remains. Make it fair, clear and related to future performance to avoid issues further down the round. In this case, it’s important to have a clause that states the entirety of the options will vest immediately if the company has an exit before the end of the 5th year (also known as ‘accelerated vesting’). The latter is far more important and it’s exclusively internal – dictating who is responsible for what within the organisation. One of the most important steps is to identify key skills – both current and potential – and put the people in the roles where they will add most value to the company. As mentioned above, he or she should be entitled to keep the respective options for that year but no more.
Different people have different ways to react to these unpleasant situations, so the only guidance is to ensure that, from the very start of the company, you consider the advice in this article (and many others) and have a robust legal document prepared by a high-quality lawyer that asks all the right questions from the outset. If it goes wrong, however, the legal document becomes your bible. Remember, if nothing goes wrong, the legal document won’t matter much. Make sure the equity split is fair and clear from the outset. Having the idea for the business is far less important than most entrepreneurs like to think. A key consideration is how the team was put together and came up with the idea. The former is true commitment and deserves the vast majority of the equity being distributed during that time, whilst the latter is simply buying an option to join the startup at a later stage and deserves little equity. Then there are other issues to consider such as the ones below. The former is mostly an external matter – titles still matter when approaching potential clients. Priorities change, and family and related expenses can grow faster than the company.
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This is the time you truly appreciate the value of having watertight, carefully thought out legal documents. Remember, if nothing goes wrong, the legal document won’t matter much. Make sure it’s a robust document covering many unpleasant situations –no matter how unlikely they may feel at the beginning of the company.