By Ed McLaughlin and Wyn Lydecker
How to split equity is one of the most important decisions a founding team will make. Harvard Business School professor Noam Wasserman wrote that nearly 40% of startup teams spend a day or less hammering out an agreement. They frequently want to get it over with – often with a quick handshake. While this is an easy solution, it can also be a very expensive mistake. “An even split may be the best answer,” he said. “But if you land there by default rather than after a thorough discussion of expectations and contributions, your team will probably suffer.” He found that discontent within teams almost triples when founders split equity equally by default.
There is no right way to divide equity. But Wasserman estimated that founders deserve more equity because they had the original idea, or because they have more relevant experience, or will take a larger role in the company. His research shows that founders who had the idea for the company get around 10 to 15 more percentage points of equity than co-founders. Founders who have led other startups generally get 7 to 9 extra points, and the one who becomes CEO gets from 14 to 20 extra points.
So don’t be too hasty — founders’ early decisions can make or break their startup and their team.
Ed McLaughlin is currently co-writing the book “The Purpose Is Profit” The Truth about Starting and Building Your Own Business, with Wyn Lydecker and Paul McLaughlin.
Copyright © 2015 by Ed McLaughlin All rights reserved.
It can also become more complicated than a split that stays the same forever depending on the contributions of each of the founders as well as their ages, family status, intentions to remain in the business, risk tolerances and financial requirements and expectations. This deserves considerable discussion among the founders when they are all friends and enthusiastic about the business.