A common concern experienced by co-founders, particularly at the early stages of starting a company is that of how to divide equity amongst themselves. If you currently have similar concerns, I can assure you that it’s a valid issue to be addressed between you and your co-founder(s), particularly before the company is formed as it will enable all involved to address uncomfortable aspects of starting the journey so as to avoid conflicts which may arise afterward.
What are shares/equity in a company?
Shares and equity are used interchangeably. Shares are a unit of ownership of a company and are offered for sale to raise capital. Equity is the total monetary value of a company.
The extent of ownership of a member of a company is measured through shares.
WHY IS AN EQUITY SPLIT IMPORTANT?
An equity split among founders is important for so many reasons;
a. If done properly, boosts loyalty amongst founders and builds trust and confidence in the heart of investors
b. Makes it easy to determine who makes decisions within a company
c. It reduces risks of the founder’s conflict or exits where an equity split is successfully achieved.
HOW TO DIVIDE SHARES IN A COMPANY AMONGST CO-FOUNDERS
Is splitting shares equally between co-founders a bad choice?
Not entirely. In fact, there are some schools of thought that are of the opinion that shares/equity should be split equally amongst co-founders as all founders are likely to bear the brunt of starting the business together.
On the other hand, there are instances where a founder appears to make more contributions toward the company than his or her co-founders. Would you recommend a 50/50 split in such situations? I suppose not.
Based on the varying opinions pointed out above, it’s safe to say that the decision to either split shares equally amongst founders or based on the scope of their contributions to the company rests on the discretion of the founders.
How do I split shares amongst my co-founders?
There is no one size fit approach to distributing shares amongst co-founders, however, there are deciding factors that help. For instance;
- The amount invested as capital
- Who brought the Idea
- Responsibilities of each co-founder
- Who is likely to face more risks while carrying out their responsibilities
- Who has prior experience or expertise etc?
After calculation, it’s important that co-founders have a written agreement that reflects the outcome of the calculation as well as addresses other issues which may affect the distribution of shares amongst themselves such as; voting rights, conditions under which a co-founder may assume total ownership of the shares in question, conditions to be satisfied for a successful transfer of shares, etc.
We recommend the best time for founders of a company to discuss an equity split is as early as possible or before a company is formed or registered, not after as it may affect the very foundation of a startup or company.
Shares or equity division amongst members of your company can be quite emotionally draining if parties do not maintain an objective disposition towards the process. If you’ll like to get the best out of splitting shares/equity amongst your co-founders, feel free to schedule an appointment through the Whatsapp icon on the lower right part of this page or reach out to us here. Our team of legal experts will be delighted to work with you in ensuring you arrive at a favorable outcome for everyone involved.