How To Plan The Equity Distribution of New Startup? |
Posted: April 21, 2021 |
In the world of startups, it is very common to use English words. The equity are the shares of a company, for example shares in the startup founder equity is divided. Therefore, when we talk about the distribution of equity of a startup, we are talking about how the ownership of the company is distributed among its partners. It is not an unimportant issue, how we distribute the shares and what criteria we use will have an impact on the future of the company: investors, decision-making, role of partners within the company. If a company starts directly with monetary contributions, the distribution is clear because it is proportional to the money contributed. However, in a startup equity calculator we are combining tangible factors (such as money) and intangibles and therefore, things become somewhat more complex. And how to distribute then? Unfortunately, there is no magic formula for these things. Rather, what we can find are reasonable criteria and some guidelines that we can put on the table to reach a consensus with our partners. There is one thing that I usually tell the founding partners of the startups I work with. If families fight over an inheritance and, deep down, they are family. What keeps the founding partners of a startup from fighting? The answer, in my opinion, is to share the same vision of the business, have clear rules of the game (partner agreement) and a good distribution of equity. When we think of a startup, we usually think of things related to the business: income model, customer, product. However, the team and the founding partners are key; therefore, a good relationship between them is essential to be able to focus on the business and not spend productive time on internal tensions. Does the distribution of equity cause internal tensions? It is quite human that we want to be clear about things; however, we seem to dislike awkward conversations. The fact of having to distribute the ownership of the company can generate tensions, especially if it is something that is postponed. To a certain extent, it seems somewhat cultural, we avoid talking about the distribution of the property of the company or the partners' agreement because it gives the feeling that it generates distrust with our partners. It is like proposing a separation of marital property, it may be logical but it is difficult for us to put it on the table because it seems to generate mistrust. Personally, I think it is healthy to talk about these things at the beginning. The reason? The sooner we are clear about the rules of the game, the sooner we can focus on generating a great product and a great business. If there is a partner who has to leave, it is better to do it at the beginning and in a friendly way than when the business picks up speed and its departure can be extremely traumatic. We can all be friends but, going back to the example of families, money can make us stop being friends. So, it is preferable that the rules of the game are quite clear.
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