You have developed a promising startup idea after extensive customer interviews and even created a prototype. However, angel investors have advised you to bring on a business co-founder. Fortunately, your college classmate with an MBA is interested in joining.
He wants to be a founder and receive founder equity. To determine a fair equity split, consider factors like idea development, CEO role, cash investment, and employee option pool. These principles can guide your negotiations with your co-founder.
Employee option pool
Prior to dividing equity, allocate a portion for an Employee Option Pool to grant options to future employees. VC expectations typically range from 15 to 20 per cent of the company’s equity.
Calculate the percentage based on the number of employees you plan to hire and the equity you intend to offer each position.
Cash investment
If you and/or your co-founder(s) plan to invest cash into the company, treat it as an outside investment. Determine a fair valuation for the company and calculate the resulting equity distribution.
Consult with angel investors for feedback on the company’s valuation based on the team and progress. For example, if you invest $50,000 in a $1 million valuation, you would receive approximately five per cent equity.
Idea development
Credit should be given for idea validation and IP development. Idea validation may warrant a five to 10 per cent premium, while IP development could receive a 20-25 per cent premium based on time invested.
CEO’s role
If there are two co-founders, the CEO should receive additional equity to avoid tie-breaker situations. The CEO role is highly valued by investors, warranting a five per cent premium.
Doing the math
Calculate the equity split based on factors like CEO role, idea development, and cash investment. Consider allocating a portion for the option pool and investment to determine the final equity distribution between co-founders.
Utilising a neutral arbiter
To avoid contentious negotiations, seek an experienced founder or investor to recommend an equitable equity split. This approach can reduce conflicts and ensure a fair distribution of equity.
Image credit: 123RF
This article was originally published on October 8, 2021.
The post Equity harmony: Strategies for fair founder equity distribution without discord appeared first on e27.
