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Joint business: How to structure equity split

Starting a business is exciting especially if you’re doing it with a good friend, a former colleague, or even a family member.

Getting lost in all that excitement is easy and a lot of times people forget to talk about the important stuff like how to split equity among co-founders. As awkward as this conversation may feel at first, it’s not as uncomfortable as having to deal with the fallout from a poorly structured, or in worse situations, a non-existent equity agreement.

Following are a number of critical factors that may be awarded points:

Role of co-founders

What will be the role of the co-founder(s)? Which aspects of the business will they be solely responsible for?

Ideally, co-founders should have complementary skills for the sake of the startup. Each founder should clearly define what his contribution is. A detailed job description should be drawn up for each co-founder.

Who is working full-time?

Not all co-founders will work full-time on the startup. If there is a full time and part time co-founder, the part-time founder should naturally get less equity because he/she is taking less risk and at the same time provisioning less value and commitment.

But, the equity split shouldn’t be used as a carrot on a stick, but rather as a tool to create good morale for the people involved in the startup.

Who brought the idea?

Although, the idea is the reason the business exists in the first place, some school of thought are of the opinion that whoever executes on the idea should get a higher equity than who brought the idea. However, this decision is up to you and your co-founders.

Idea execution

This still boils down to execution. Who will do the majority of the work? Building the MVPs can be time-consuming, so whichever co-founder(s) responsible for this task should definitely get some equity consideration.

Industry contacts

Networking is key to the growth of a startup. If one co-founder is responsible for linking your startup up with industry contacts, then you may decide to give a bit more equity.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.