A fair and equitable division…
The second most common mistake made in splitting the equity of a startup is to simply divide the shares equally amongst the founders.
RULE 7:
Splitting the equity equally is usually the wrong split.
While this seems the most fair and equitable division, and while it seems to greatly simplify the discussion, it is rarely the best long-term choice.
Why? First, some founders take on more responsibilities and risk than others. For example, it is very difficult to run a company via consensus. It is far simpler to have someone take responsibility for the final decisions who listens to the management team and (at times) the shareholders, but putting a single person in charge. This role is far from easy and requires a unique set of skills. And when things go wrong, this person often takes the blame and often is the first of the founders asked to leave. For both these reasons, this person deserves a larger percentage of equity.
Second, and closely related, it is rare that everyone on the founding team truly puts in an equal amount of effort. Usually, just one person had the idea. Often, one person paid for the expenses before the company was incorporated. Sometimes one or more of the team members has yet to quit his/her job or has a second job on the side to pay their bills. Plus, there are often advisors who helped early on, but who will not be joining the team at all.
Third, there are market norms for both salary and equity for the positions in a startup. All of the positions, including the CEO, are hirable, i.e., you could hire someone to do the job who isn’t a founder or co-founder. Market norms say that CEOs are worth more equity and that the person designing and/or building the product is worth less; also, that sales people often have different compensation structures, measured by actual sales. And so on.
Typically, the percentage of equity is proportional to the salary. Thus, if you find a salary survey or salary guide for your location and industry, you can use that as a starting point to determine a market value of each position’s equity share.
Fourth, someone needs to have a deciding vote. There are times when a decision goes beyond the CEO and is decided by the shareholders. For example, selling the company, raising money, or, in too many cases, shutting down the company. If the shares are split equally, then these tough decisions may wind up deadlocked, resolvable only by lawsuits. Such situations can kill companies. Having even just one deciding share in the hands of one person can avoid these situations and let the shareholders come to a final decision. Thus, if nothing else makes sense for your team, give one person one extra share to let him or her break a tie and cast a deciding vote.
