The Startup Checklist

5Allocate the Equity in Your Startup

Developing an equity-sharing plan that fairly recognizes, honors, and rewards the contributions of multiple cofounders is a challenge faced by every startup with more than one founder, and one that has probably caused more grief than any other issue. As such, there are many good blog posts and articles on the subject that can help provide perspective.^*

Allocating Equity

The one thing that all these experts agree on is that the most obvious, simple, and seemingly objective way to divide the equity in a startup business—namely, an equal split of the equity among the members of the founding team—is the wrong way. Instead, the founder(s) need to do the fairest job they can of assigning relative value to what everyone is bringing to the table.

One factor that makes this difficult is the huge variation in what differing team members may contribute. Founder A may be the creator of the original business concept. Founder B may have the greatest level of industry knowledge and experience, and the practical skills required to turn the concept into a working reality. Founder C may be willing and able to work incredibly hard at the business, keeping the company running under tough circumstances and providing a huge amount of “sweat equity.” Founder D may provide strong personal connections to key business partners who can make the difference between success and failure. And Founder E may invest a significant amount of personal money that helps get the ...