How to Split Company Shares 3 Ways

In the second year, they will hire another 20 employees. Everyone needs 50 shares. They get fewer shares because they took less risk, and they get 50 shares because we give each layer 1000 shares to divide. That`s why I`d always rather share a new business 50-50 with a friend than insist on owning 60% because “it was my idea” or because “I was more experienced” or whatever. What for? Because if I divide the company 60-40, the company will fail if we argue to death. And if you just say, “Hell, we can NEVER figure out what the right division is, so let`s just be buddies and go 50-50,” you`ll remain friends and the company will survive. If a person intends to leave their current job to work full-time in the new company, this change carries a much greater risk than that of the founding partner, who is only willing to work part-time until things take off. Stock splits should reward a combination of the highest-rated contribution and the greatest promise of risk. Lol Shares are a form of share capital, but equity is made up of more than shares. Other forms of share capital include stock options, bonds, warrants, paid-up capital, retained earnings, etc. However, stock options are not part of equity until they are exercised. The individual contribution of each person to the intellectual property of the company.

Determining an appropriate and fair distribution of equity among founders, investors and employees can be daunting. Below is a list of important factors to consider when calculating the right equity allocation for your new business. From a decision-making point of view, there must be a tiebreaker, otherwise the company could suffer. An odd number of partners with equal voting rights solves the problem of blocking decisions, but if there is an even number of partners with the same ownership, one possible solution is to allocate tie-breaking shares to an external advisor, who can also be a member of the board of directors or simply a shareholder. When the decision is voted on, the external consultant chooses which side of the decision makes the most sense and votes for it, thus overcoming the impasse. When considering this solution, choose a third party who can be objective and make decisions based on the company`s expertise and knowledge. Action calculators, such as those offered by founder Solutions and Foundrs.com, can also be useful. Equity calculators take into account a variety of factors (ideation, time spent outside of other projects, estimation of hourly wages, etc.) when calculating stock splits. Foundrs.com also offers this useful venture capital calculator. There is no one-size-fits-all solution to this problem, but anything you can do to make it simple, transparent, direct and, most importantly, fair, will make your business much more likely to succeed.

What happens if someone brings equipment or other valuable assets (patents, domain names, etc.) into the business? Big. Pay it in cash or promissory notes, not shares. Find out the right price for the computer they brought with them, or their smart word processing patent, and give them a promissory note that will be paid if you do well. Trying to buy things fairly at this early stage only creates inequality, arguments, and injustice. Using the example above. We are two founders, we gave ourselves 2500 shares each, so we own 50% each, and now we go to a VC and he offers to give us a million dollars in exchange for 1/3 of the company. Here is the principle. As your business grows, you tend to add people on “shifts.” Be realistic, but not stingy. Keep in mind that a larger share of equity usually means more incentive to help the business succeed.

Founders: 20 to 30% of co-founders. The company`s contribution is rarely exactly 50/50 and the allocation of shares should be based on a variety of factors, including those discussed above. After conversion, it is easy to use slices to determine shares. You simply divide the discs provided by a person through all the flaps and you have an exact percentage. That is absolutely right. This changes over time to ensure that everyone gets what they deserve all the time. People who do not take a salary should also receive a share of the bonus. For me, it`s no different from financing the company. So if someone defers an annual salary of $100,000, it`s like a 20% stake in a brand new startup. So if all the other things are the same, a 50/50 split would be closer to a 60/40 split, using the same calculation and logic that we used in the #1 cash investor example above.

[1] If you`re worried about what will happen if you have to part ways with a co-founder, make sure you have an appropriate acquisition schedule. In the valley, it is a typical configuration to add a one-year”cliff” for four years. In other words, while on paper you could own 50% of the company, if you leave or are fired within a year, you don`t leave with anything. After one year, you will receive 25% of your inventory. Each month thereafter, you will receive an additional 1/48 of your total stock. You don`t earn all your shares until the end of four years. This ensures that the founders are a good long-term fit – and if there is a problem, you can solve it in the first year without any damage. Another good emergency measure is that only the CEO holds a seat on the board of directors before significant equity financing. This will avoid board disputes in difficult decisions, for example in the unlikely event that the CEO should fire a co-founder. How much should investors own compared to founders and employees? It depends on market conditions.

Realistically, if investors end up owning more than 50%, founders will feel like tenants and lose motivation, so good investors won`t go greedy that way. If the company can start without investors, the founders and employees could end up owning 100% of the company. For all these reasons, you need to be careful before distributing shares between partners and founders – sharing shares can be the hardest thing to do as a member of a founding team. You will hurt feelings, make difficult decisions, and live with the consequences. However, keeping these tips in mind will allow you to sit back and relax at night knowing that you have done everything you can to monitor the process as fairly as possible. While you certainly don`t want to last too long without determining a concrete division of actions, this task is not something you should skip. Patience is key, and you and your founding team should spend time listening to concerns, asking questions, and reviewing all aspects of the split. For businesses that end up being very successful, the difference of one percentage point can mean hundreds of thousands of dollars. Don`t ignore the details to avoid difficult decisions. Everyone wants a little fairness, no matter how much work they`ve invested. As a member of the founding team, you need to take responsibility for dividing equity in a way that is fair to all parties involved, while positioning your startup for long-term success.

Here are the main factors to ensure that the process is based on fairness: What happens if one of the founders does not work full-time in the company? So they are not founders. In my book, no one who doesn`t work full-time counts as a founder. Anyone who sticks to their daily work receives a salary or promissory notes, but no equity. If they stick to this day-to-day work until the VC provides the funding and then works full-time for the company, they haven`t taken as many risks and deserve to earn equity with the first layer of employees. .