Equity Break-up

Hands and money puzzleThe majority partners at any start-up will be faced with a difficult decision as to how they intend to split up equity (ownership) of the new venture. While this advice may seem counterintuitive, it is best to not allocate the equity evenly among the founders/partners. Instead, there needs to be a clear majority owner. This majority owner needs to have the most influence on the company. Start-ups can’t enter into a situation where every partner has the same influence or number of votes.

If all partners are given an equal ownership and an equal number of votes, it will make settling disagreements very difficult. If two owners each have 50% of the votes or three owners each have 33% voting power, it will mean that no one will ever have the majority influence and the ability to resolve disputes. In a start-up environment, nearly every decision is up to dispute and if there is no clear leader, defined by their majority stake in the venture, dispute resolution will be nearly impossible.

Thumbs UpTry This: The founders, as a group, should select an agreed upon leader and majority owner of the enterprise. The more easily this person is “elected” the more easily you will be able to tackle other big decisions.

 

 

Thumbs DownAvoid This: Don’t make the equity break-up arbitrary. Have a logic, formula, or methodology to the equity break-up decision.

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