As a startup founder, determining how to split equity among your team can be a daunting task. At Lazo, we understand the importance of this decision, and would like to provide you with the tools and guidance you need to make the process as smooth as possible.
There is no correct or incorrect answer to “How should we split the equity?”; how you allocate your ownership will be determined by the team you’ve created, everyone’s degree of competence, past business experience, and potential value contributions.
Most teams at the earliest stages choose an equal equity split for the sake of avoiding conflict, or convenience. However, months or even years later, they discover that not everyone contributed equally, and conflict arrives anyway.
The equity discussion early on, whether you settle on an equal split or not, may save you time and make everyone on your team more comfortable:
A startup’s currency is equity. And, like a precious commodity, founders should guard it.
As the business grows, the founding team’s equity gets diluted, resulting in a decreasing ownership stake. In turn, this will affect their control over the company.
Early-stage founders should generally give equity to themselves, early hires, and advisors (which typically get between 0,25% and 5%, depending on their level of involvement).
It is important that you consider each factor related to a founder’s contribution to the company’s value when determining a fair equity split.
Idea/ Intellectual Property (IP): it includes who came up with the original idea and who contributed to the creation of the IP. The person with the idea should, of course, get some equity, but it’s execution should also be considered.
Risk & Commitment: it is important to consider whether a founder is full-time or part-time when evaluating commitment. When someone enters startup life, they give up financial, emotional, mental, and reputational considerations.
Responsibilities & Duties: in a startup’s early stages, the Chief Executive Officer’s (CEO’s) responsibilities in fundraising will be more important than those of the Chief Operating Officer.
Expertise/domain: it would be a great advantage if a founder has prior business experience building a startup (even if they failed), as that experience would still be valuable to a startup.
Investments: don’t get greedy. Quantify the capital invested in a reasonable manner, particularly if not everyone can contribute.
Equity conversations are never the same from one person to another.
Taking these negotiations openly takes maturity and ultimately strengthens the team.
Sit down with your co founders and think about the factors outlined in this article.
Wishing you all the best!
The Lazo Team 💜.
