There are many different ways to approach equity compensation for the founding team. Thus, there’s not necessarily a one-size fits all answer to this question. However, we have some specific recommendations based on our experiences starting a company as well as advising many start-ups.
Discuss equity ownership before launching the business
First, discuss compensation upfront with your co-founder before you get to work and put it in writing. One of the biggest mistakes you can make when starting a company is casually discussing equity ownership with your co-founder and deferring the formal agreement until after you get the business started. You should be very clear as to the equity ownership percentages from the very beginning.
Establish a methodology for determining equity ownership
Try not to be emotional and selfish when discussing equity ownership with your co-founder. Ideally, you should share a common vision with your co-founder and acknowledge that the success of the company is more important than your personal interests. Specifically, the amount of equity you and your co-founder receive in the company should be dictated by a methodology that awards the highest valued contribution and those bearing the largest risks. Factors that you may consider in reaching an appropriate equity percentage for each founder may be: idea-generation, capital contribution, ability to raise capital, business planning, domain expertise, operational management, total responsibilities, legal responsibilities etc. You shouldn’t just split the ownership percentages at 50/50 if there are two founders. Rather, you should construct a list of the most important elements of the business and how much each founder is able to contribute to that part of the business. In addition, you aren’t supposed to necessarily reach a final equity percentage with your co-founder quickly. It’s supposed to be a discussion and a negotiation.
If you’d like to control the decision-making part of the business, you should be the majority owner of the company and have the majority of the board votes or greater than 50%. Typically, the CEO and Chairman of the Board of the company will be the majority owner of an early stage company, but it can vary by business.
->Should You Seek Venture Capital For Your Business?
->What Should I Include In My Business Plan?
->What Financial Advice Should I Know When Launching A Business?
->Should You Trademark Your Business Name?
->How Should I Think About The Financial Model For A Business Idea?
->What Type Of Success Should I Expect As An Entrepreneur?
->Should I Use A Crowdfunding Site To Raise Capital For My Business Venture?