How Should We Divide Equity Among Co-Founders?
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I understand that one's share of equity should be contribution-based. However, when you are making arrangements with co-founders, is there a generic rule of thumb that you must follow? If you want to control future decisions of the startup as originator of the concept, how do you make sure to retain the full control?
There are many different ways to approach equity compensation for the founding team. There is not necessarily a one-size fits all answer to this question. However, I have some specific recommendations based on my experiences starting a company as well as advising many startups.
First, discuss compensation upfront with your co-founder(s) before you get to work and put it in writing. One of the biggest mistakes you can make when starting a company is casually discussing equity ownership with your co-founder(s) and deferring the formal agreement until after you get the business started. You should be very clear as to the equity ownership percentages from the very beginning.
Try not to be emotional and selfish when discussing equity ownership with your co-founder(s). Ideally, you should share a common vision with your co-founder(s) and acknowledge that the success of the company is more important than your personal interests. Specifically, the amount of equity you and your co-founder(s) receive in the company should be dictated by a methodology that awards the highest-valued contribution and those bearing the largest risks. Factors that you may consider in reaching an appropriate equity percentage for each founder are: idea generation, capital contribution, ability to raise capital, business planning, domain expertise, operational management, total responsibilities and legal responsibilities. My point here is that you shouldn't just split the company 50/50 if there are two founders. Rather, you should construct a list of the most important elements of the business and how much each founder is able to contribute to that part of the business. In addition, you aren't supposed to necessarily reach a final equity percentage with your co-founder(s) quickly. It's supposed to be a discussion and a negotiation.
If you'd like to control the decision-making part of the business, you should be the majority owner of the company and have the majority of the board votes or greater than 50 percent. Typically, the chief executive and chairman of the board will be the majority owner of an early-stage company, but it can vary by business.