Splitting private equity among the founders of small businesses may seem an easy task. After all, it is widely accepted that founders – and even just the pioneers behind a successful business – deserve equal shares in the company’s equity. Or are they? Some experts believe that equally splitting the equity among the founders is not really the best decision that entrepreneurs can have.
Splitting the equity equally seems fair for those involve. Actually, it is. But fairness should not be the only thing that matters when it comes to equity and revenue discussions. There are possible scenarios that founders must think about when discussing about the sharing of equities. Among these scenarios, one expert notes, is the possibility that someone from the group of pioneers would back out and leave the group. Why give him people equal shares of the equity if they will just leave the business after a few months?
The role of the people involved in the business is also crucial. Consider this scenario: Marco has a business idea and he decides to share this to Paul. Later on, the two of them decide to establish a business based on Marco’s idea.
During the establishment phase, Marco and Paul realize that they need money to finance the operations of the business. To solve this, they decide to contact their friend Anna to ask for some capital. Anna agrees to provide money for the business on the condition that she will be considered a “founder” of the business.
The question is, would it be fair to split the equity equally between Marco, Paul and Anna? Paul would definitely agree to the proposal, but it may seem unfair for Marco and Anna.
Marco was the one who had the idea, and it was Anna who provided the capital for the business All Paul did was to agree with the idea and probably help in convincing Anna to fund the business.
Unless Paul did something relevant for the company (such as managing the manpower or using his networks to help in the actual formation of the business), it may seem inappropriate to give him an equal share of the equity.
Founders of small business often have personal relationships prior to the creation of the business. However, entrepreneurship is a professional field, and people should understand that partnership should always be prioritized over personal ties.
Instead of looking into the years of friendship or familial ties, co-founders of the business should look into the professional aspects of the company when they are deciding on equity split.
Some of the factors that should be considered include the business idea, the intellectual property, the capital, time, opportunity cost, and expertise of the person on the industry where the business is a part of.
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