Determining how to split equity can be a daunting challenge for founding members of a new company. Generally, it is common practice to give a larger share to the founder who came up with the idea to start the business. However, there are many different circumstances that might drive such determinations
One question that founders may want to consider revolves around the prior circumstances of each founder of the company. For instance, if one person came from a $100,000 a year job to help create a new company, that person may need to be compensated for the risk. Therefore, it may be worthwhile to give that person a larger share than may otherwise have been allocated.
When determining equity divisions, it is also important to decide what role each person will play in the company. In most cases, an executive within the company is going to get a larger share than a silent partner or an employee. He or she may also have put more money and time into the company compared to other founders. Those who have more capital exposure may need to be compensated for that additional risk with more equity in the company.
Before deciding each person’s equity stake in a company, it may be worthwhile to have a meeting with the founders and legal counsel. This may make it easier to spl account for each founder’s equity in the company’s business plan. Determining the equity split prior to beginning operations may make it easier to attract additional investors and determine what happens to interest in the business if a founder leaves or otherwise wants to divest their interest in the company.