Questions to Ask When Dividing Founder Equity
September 06, 2017
By Charles Weinstein
A group of former college roommates has an idea for a disruptive new smartphone app. Among them, they have a valuable network of contacts, deep coding and design skills, a little financing, and the rigid determination to bring this potentially lucrative product to market. Things appear promising.
Looking ahead, however, the decisions the group faces seem monumental: create a business plan, secure financing, perform beta testing, develop a distribution channel, and on and on.
One important, often-overlooked “housekeeping” issue that is best tackled now, versus later, is splitting the start-up equity. Don’t underestimate the impact here. Dividing founder’s equity sets an important tone going forward. It shows the business world your negotiating acumen and the ability to tackle the tough issues.
Hopefully the equity discussions among founders will go smoothly, but there’s always the chance they become contentious. Take a deep breath, and ask yourselves several questions that could provide the invaluable insight needed to help set the burgeoning company on a path toward harmony and success:
- How and under which circumstances should we do an uneven ownership split?
- What are the tax implications?
- Is it a good idea to have a vesting schedule for founders?
- What impact do financing sources have on the equity decision?
Read my answers to these and several other critical questions on splitting start-up equity in my recent article for the VC-List e-newsletter.
The bottom line: Talk it through. Make every effort to avoid the “let’s just shake on a number and move on” approach. In addition to the economic ramifications, don’t discount the emotional ones, particularly if the new company involves close friends or family members.
Catalyst - Winter 2017