Distribution of equity among founders at start-up

A friend called me about this issue.

I don’t have the solution for every given situation but I thought I would share my thoughts with you.

Feel free to comment or improve on my points!

I recommend starting with an equal share for each Founder, not each employee, I stress.

If you can’t tell the difference – you are an employee!

Say you have two founders….

Your shareholder agreement should allow for those shares to be bought back by the company at a nominal sum in circumstances where the 50:50 split is no longer fair.

This would be by consensus or failing that with arbitration provided by a trusted third party – chairperson, lawyer etc.

The shares should become whole on three dates

1/3 whole on first anniversary, 1/3 on the following two anniversaries.

After a year you should know if the 50:50 is fair, but if not – you have two further board meetings to set things right.

If you are still not sure about the correct split after 3 years….it does not matter!!

If you don’t raise funds, you can give a 3d party a casting vote – a chairperson or a professional advisor like your legal advisor.

This deals with the unlikely event of a complete empasse on key decisions.

If you do raise funds, a 50:50 split will no longer be an issue. You will have a third voting block and hopefully they will be valuable and active in helping you make the right decisions.

The only reason for moving from a 50:50 is if one person is demonstrably creating more shareholder value than the other.

Even this extreme case can dealt with this elsewhere:

Salary
Annual bonus
Share Options

That’s my tuppence worth.

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