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3 Equity Tips Every Startup Founder Should Know

Startup business teamwork
By Lisa M. Schaffer, Esq. | Last updated on

Marry in haste, repent at leisure. The producers of The Bachelorette might disagree, but the vast majority of corporate founders would whole-heartedly nod their heads, and have five war stories to back it up.

Division of equity is the leading cause of angst among founders. If you and some co-founders are about to dive into the startup pool, and are wanting to talk equity split, here are a few tips to dodge the equity bullet.

1. Wait

From the outset, founders are tempted to talk equity, which really is just power and money wrapped into one shiny ball. Whether it's because they like the other founders and want to get the "uncomfortable stuff" out of the way, or because they feel it will create clarity in developing the business, there's a feeling this needs to be one of the first decisions. But truly, as research shows, it shouldn't.

New homeowners may come up with great ways to remodel a house, only to find that if they had waited to see how they actually use the space, they would have done a better remodel. Same with equity stock. Wait to see which founder puts in more time and effort, which sticks around, which has the ideas that work, etc. Time will tell, and if this is really a great new company, you have time. While you're waiting, think about the division.

2. Fair Doesn't Have to Mean Even

As you take time to peel the proverbial onion, it will become clear that a fair split of the equity doesn't necessarily mean an even split. Research also shows that teams that negotiate equity splits over a longer period are more likely to decide on an unequal split, as they uncover differences in past and future time/idea/financial contributions, involvement in outside opportunities, and general preferences. Also, investors prefer unequal equity splits, as it signals that founders aren't opposed to having uncomfortable conversations and decisions.

3. Save Some for Later

Remember that others will be joining the company that will want to have founder's shares, which, by the way, have different tax consequences than common shares. Therefore it is wise to leave a large slice of the equity pie for future employees, which is what Google founders Larry Page and Sergey Brin did, and subsequently hired Eric Schmidt as CEO. Founders are often relegated to Vice President roles as investors bring in seasoned executives to lead the company into it's next phase. If shares haven't been reserved, it may be difficult to ensnare future investors and/or executives.

If you are ready to create an equity agreement, have it drafted by an outside business organizations attorney who can create a binding contract that includes everything you may want, and probably even a few ideas you haven't considered.

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