Oftentimes, we explore various combinations of ownership in our ideas and businesses. And that leads to an uneven split for a variety of reasons. Here, we’re discussing ways to split the pie objectively and the excuses that prevent us from doing that.
Equity, or ownership, is a way to fund your idea. Every entrepreneur commits financial capital and needs co-founders (rarely one does not) and investors to grow. Often, I hear this question: How much equity should I give to my co-founder? But I will rephrase the question: How much is my cofounder worth to the business?
Why did I do that? Your co-founder is as vital as you are, which is why you onboarded another founder. There are limitations to what you can do and cannot do. Things that are can’t do’s for you are ideally your co-founders best do’s, and if that is not the case, one should perhaps revisit the decision of having that co-founder.
Secondly, equity drives motivation. Holding ninety-five percentage of a company which makes no progress is worthless; whereas keeping equal proportions of ownership in a remarkable company is worth much more. Having said so, when you start-up all the work is in front of you. You also have opportunities to invest more and acquire fresh equity, which all the more makes a lot of sense to split equally.
Thirdly, one thing most entrepreneurs get wrong is the belief that the idea is superior, which, my friend, is very far from the truth. The idea has worth when you value execution and respect timing in the market, i.e. you should not be ahead or behind the market.
Fourth. When you, as the founder, do not value your co-founders, how can you expect investors to trust your team? Very often, investors look at equity splits as a cue. If you give a co-founder 10% or 1%, others will either think they aren’t worthy or aren’t going to be very impactful in your business. Quality of the team is the top reason why investors invest and communicating to them that you do not immensely value the team is the last screw-up you would want.
Lastly, it takes at least five years to build a company of great value. Early variations do not justify massively different equity splits in the following years.
The Math-driven split
Oftentimes, we explore various combinations of ownership in our ideas and businesses. And that leads to an uneven split for a variety of reasons. Here, we’re discussing ways to split the pie objectively and the excuses that prevent us from doing that.
Equity, or ownership, is a way to fund your idea. Every entrepreneur commits financial capital and needs co-founders (rarely one does not) and investors to grow. Often, I hear this question: How much equity should I give to my co-founder? But I will rephrase the question: How much is my cofounder worth to the business?
Why did I do that? Your co-founder is as vital as you are, which is why you onboarded another founder. There are limitations to what you can do and cannot do. Things that are can’t do’s for you are ideally your co-founders best do’s, and if that is not the case, one should perhaps revisit the decision of having that co-founder.
Secondly, equity drives motivation. Holding ninety-five percentage of a company which makes no progress is worthless; whereas keeping equal proportions of ownership in a remarkable company is worth much more. Having said so, when you start-up all the work is in front of you. You also have opportunities to invest more and acquire fresh equity, which all the more makes a lot of sense to split equally.
Thirdly, one thing most entrepreneurs get wrong is the belief that the idea is superior, which, my friend, is very far from the truth. The idea has worth when you value execution and respect timing in the market, i.e. you should not be ahead or behind the market.
Fourth. When you, as the founder, do not value your co-founders, how can you expect investors to trust your team? Very often, investors look at equity splits as a cue. If you give a co-founder 10% or 1%, others will either think they aren’t worthy or aren’t going to be very impactful in your business. Quality of the team is the top reason why investors invest and communicating to them that you do not immensely value the team is the last screw-up you would want.
Lastly, it takes at least five years to build a company of great value. Early variations do not justify massively different equity splits in the following years.
The Math-driven split
So how do you derive the correct split, objectively? Can some math help? Fortunately, yes. The math I prefer when I consult new businesses is the idea of discount and opportunity cost. Everyone, including yourself, has an opportunity cost, and one should receive adequate compensation.
How does the math work? Find the industry average or median salary you would earn if you take up a job. Do the same for your co-founder. Make inflation-adjusted calculations for the next ten-years with appropriate experience. Once you have the amount of money, each of you will earn if you get a job instead helps to set a baseline. Discount each of your salaries and determine the net present value (NPV) using an average inflation rate of your country for the last twenty years.
Let us call the NPV as your market worth. Now create a ratio of the market worth for all co-founders and split the equity-pie. You can change each value by a small percentage, not more than twice the number of cofounders, which means for an idea with three cofounders each one has a range of 12% to the determined equity split.
Now there is math for that range as well, and we will discuss that in the subsequent post. As an overview, it covers variations in age and experience, skillset, functional requirements, and the difference in joining periods and if your partner is in full-time or is working part-time.
I love feedback and would be delighted to connect with you, visit: Siddhartha on LinkedIn
Siddhartha Sharma
CFA Institute Working Body Member | UN Climate Leader | Angel Investor | WEF Global Shaper & former fintech entrepreneur
