How to Split Equity Funds in Your Startup
A lot of things change between the idea of starting up a fresh, new business and it becoming highly profitable. Whether big or small, whoever had even a tiny part in this whole process starts to maneuver for the position and fight for a piece of equity in the company. In some or the other way, everyone wants some part or some equity regardless of a number of efforts they have put in.
I am often asked this question about how to best divide the equity among founders in a startup. Of course, this is not an easy task. But according to me, the main issue with splitting equity arises when there is never a clear cut. Most of the times, when such scenarios involve more than 2 people, disagreements will rule over what kind of value people get to the table. However, if you ensure certain guidelines to follow then you may end the process in complete fairness.
As a co-founder of successful mobile app development agency, below are my top tips for all startup founders to ensure the process is grounded in justice.
Splitting Equally Among Founders
Well, this can be implemented only if all the founders are putting the same amount of hard work and money into the business. Otherwise, this method is not suggested. In the starting, it may seem a bit easier way to execute but later on, it may get some troubles because of the inequity. It may be unfair especially if one founder funding capital than the rest and the others are just investing in the business. So if you are sure that every founder is putting the same amount of efforts and money into the business then this can be an easy and smart way to divide the equity.
Take Advantage of Tools & Resources
This is said to be a very hands-on approach to dividing equity. To put in simple terms, take advantage of cap table management such as eShares. Such things can save a lot of time and streamline the entire process. There are dozens of online tools and resources available to help you right from stock option expense accounting to distributing dividends. You can also seek the help of angel investors to fund your startup.
Who Invested What
With startup founder equity, the simplest way to split equity evenly would be based on how much capital did each founder invest into the business. This way you can easily a startup equity calculator to assist you to find how much equity each founder deserves. Other than money a lot of other things go into this such as time.
If everybody is putting the same time and dedication into the business then this is a fairly simple way to divide equity. But this is not the case in most of the times. When splitting the equity this way, you will need to be crystal clear with all your co-founders what is expected out of them throughout the course of the business. Because once everyone is agreed upon the given terms of the equity division rates, then you can finally split the equity based on the terms and conditions.
In the end, splitting equity is one of the toughest things that startup founders have to do. But making tough decisions is what makes entrepreneurs stronger in this competitive business market. However, by keeping in mind the above-mentioned tips in mind, you can divide the equity as fairly as possible.