When businesses first begin, it can be incredibly tempting to split equity equally among the founders. However, as many business experts will warn, this is usually a really bad idea. You can certainly choose to split equity how you choose, but when everybody has an equal piece of the pie, it can lead to tension and issues once the business generates revenue.
Still the question remains, how do you establish equity? You can do so by crafting an operations agreement that breaks down the financial aspect of the business. A few considerations to keep in mind as you move forward:
- Evaluate the role of each founder. It is likely that everybody came into the business with their own set of skills. Perhaps one person focuses more on marketing while another actually invented the design of the product. You’ll want to weigh how those things impact the amount of equity each person has.
- Don’t conduct business based on emotion. You may be close friends or family with the other co-founders. However you can’t base decisions about equity on how you feel about the individual. Try to remove the personal aspect from the decision-making process.
- Think long-term. You don’t know what kind of relationship you will have with the other members as time moves on. You will want to be sure that your business is still functional even if they move on. The amount of equity divided among the members could certainly impact that.
You have to decide the best way to divide equity and second you have to put it in writing. A business attorney can help.is a marketplace of many freelance attorneys that are highly skilled and experienced. Our rates are affordable and we offer flexible payment solutions. We’ve already helped over 1000 start-ups. Let’s work together.