What's a Dynamic Equity Split for Startups?
There might be fewer cooks in the kitchen at a startup, but that doesn't mean divvying up the equity pie is any easier. Sure, you could say everyone in the room gets an equal share, but did everyone really contribute equally up to now? And will they in the future?
So how do you allocate equity based on a team member's actual contributions, rather than their anticipated ones? Luckily, some smart folks have been after this question for a while, and come up with a dynamic equity split system. So how does it work?
It's All Relative
The trick, according to TechCrunch, is assigning "a relative value to the various contributions from each participant." Mike Moyer, who literally wrote the book on dynamic equity splits, puts it this way:
"The key is to set a relative value that is fair given someone's background, experience and job responsibilities. For instance, the sweat of an experienced CEO with a couple of homeruns under her belt is relatively more valuable than that of an entry-level graphic designer. However, two founders with similar skill-levels may have a similar value to the firm."
Contributions can come in the form of time, capital, ideas, or resources and the most important thing to do as a startup team is identify the businesses needs, who will provide them, and what that need is worth to the business as a whole.
Do the Math
Once those relative values are set, you divide an individual's contribution by the total contributions to get his or her percentage of equity. But here's the other trick -- because the total contributions can change over time, so can an individual's share of the equity. While this can delay equity distribution, it can mean that every member of the startup team is valued according to their worth to the company, making the startup more attractive to current and prospective employees as well as potential investors.
If you have more questions about equity splits or would like legal advice in creating founding and equity split documents for your startup, you can contact an experienced commercial attorney near you.
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