How To Divide Stock Equity In Your Startup

What happens is that the partner remains motivated since they want to protect the stock they have received and also build value for the rest of the stock they will receive.

If the partner or employee doesn’t continue to do the job they agreed to do, they stop receiving equity. 

This prevents the major problem so many face, which is that one partner loses interest in the business, or has personal reasons that prevent them from doing all the work the other partner is doing. But they still have 50% of the company, since that was the agreement on Day 1.

It’s not fair and the still working partner gets very frustrated and angry. This is why vesting is so important: You get what you have earned.

Value of Cash vs. Sweat Equity

Normally there are two main ways to obtain equity in a new company. One is via cash contribution, and the other is sweat equity.

Sweat equity is doing work for the business in exchange for stock equity. You don’t get paid a normal cash compensation.

Cash of course is the infusion of Capital into the business.

Each type contribution results in equity being distributed to the contributor – and there is often a premium assigned to a cash contribution. This is because cash is fungible and can be used at any time for any purpose, where is sweat equity it’s not something you can go out and spend or use.

The Steps to Divide Stock Equity in Your Startup

Now, let’s get down to the nitty-gritty of “how to divide stock equity amongst startup founders”. Here are some actionable steps you can take:

1. Assess the Contributions of Each Founder: This doesn’t just mean financial contributions. Consider the skills, experience, and network that each founder brings to the startup. The one who came up with the idea might not necessarily get the most significant share if another founder brings more value in other areas.
2. Project Future Contributions: Startups are all about the future. What will each founder contribute moving forward? This might be more difficult to quantify, but it’s an essential factor in dividing equity.
   What can you expect from your partner as far as time, and completed goals?

   What can they expect from you?

   Unless you have in-depth discussions and written agreements about these things, you could easily end up in a heated argument which can tank the company.

3. Determine the Vesting Schedule: A vesting schedule determines when the founders can exercise their stock options. A typical schedule is four years with a one-year cliff, meaning that the founder doesn’t fully own the shares until after a full year. This ensures that founders are motivated to stay with the company.
4. Get Legal Advice: It’s crucial to seek legal advice when dividing stock equity. A lawyer can help ensure you’re making decisions that protect you and your company in the long term. Here is a link to a helpful article on why tech startups need a lawyer.
5. Decide How To Solve Disputes : If you need to dissolve the partnership, what are the rules? What if you need arbitration to help you solve a dispute, what is your agreement?
    

   Partner disputes are one of the most common reasons new companies break apart, so work out a good operating agreement first!

6. Put It in Writing: Once you’ve made your decisions, get them in writing. This helps avoid disputes later on and ensures that everyone is on the same page.

Common Mistakes When Dividing Stock Equity

It’s important to be aware of common mistakes that startups make when dividing equity. Here are some pitfalls to avoid:

• Dividing equity equally among founders without considering their contributions and future roles.
• Not considering vesting schedules, leading to problems if a founder decides to leave early.
• Not getting legal advice. This could lead to legal complications down the line.

Conclusion

Understanding “how to divide stock equity amongst startup founders” is a critical part of starting a business. It’s not a one-size-fits-all situation. Every startup is unique, and the division of equity should reflect that.

By taking the time to assess each founder’s contribution and considering future implications, you’ll ensure a fair and strategic equity split.

Remember, it’s always wise to seek legal advice to protect your company and its founders. You’re not just building a business; you’re building a future.

Additional Resources

For more information on entrepreneurship and startup best practices, check out these useful posts:

• The 4 Business Basics Every New Entrepreneur Should Know
• Becoming an Entrepreneur
• What is Market Research and How to Do It

Also check out these amazing resources for learning more about splitting equity in your startup:

1. **Y Combinator – How to Split Equity Among Co-Founders**: Y Combinator offers a guide specifically for co-founders looking to understand how to split equity fairly.
(https://blog.ycombinator.com/splitting-equity-among-founders/)

2. **Founders Institute – Equity Split Guide**: This guide takes you through the equity split process, providing insights and principles to help make informed decisions.
(https://fi.co/insight/equity-split-guide)

3. **Slicing Pie – Dynamic Equity Split**: Slicing Pie provides a model and tools for creating a dynamic equity split that adjusts over time based on contributions.
(https://slicingpie.com/)

4. **Cooley GO – Equity Calculator**: This is a free tool that can help you calculate equity distribution among founders, employees, and investors.
(https://www.cooleygo.com/equity-calculator/)

5. **Harvard Business Review – Divide Equity Fairly**: An insightful article on some of the principles and methods to consider when dividing equity.
(https://hbr.org/2013/02/how-to-divide-equity-to-startup)

6. **AngelList – Startup Equity Basics**: AngelList provides an overview of startup equity, touching on aspects like vesting, stock options, and agreements.
(https://angel.co/blog/startup-equity-basics)

7. **Coursera – Startup Financing Without VC**: A course focusing on alternatives to traditional VC financing, including equity distribution among founders and early employees.
(https://www.coursera.org/learn/startup-financing-without-vc)

8. **Stanford’s Entrepreneurship Corner**: They offer various lectures and videos on entrepreneurship topics, including equity split.
(http://ecorner.stanford.edu/)

These resources can guide you, but consulting with a legal professional or an experienced entrepreneur mentor might also be invaluable as you tailor an equity split that suits your unique situation.

Remember, as an entrepreneur, it’s crucial to stay informed and keep learning. Now go forth and build your startup with confidence 🙂 !