When founding your start-up, you need to consider whether or not there will be co-founders. If so, how many shares will be given to each co-founder? The number of shares each founder gets says how much of the company they will own.
Unfortunately, deciding how to allocate shares at the beginning of a start-up can be pretty tricky. The difficulty is that it is incalculable to tell just how valuable the company will be in the future and how committed the co-founders will be in terms of their contribution to the future value of the start-up.
Hence, co-founders get equity based on what they bring to the table, such as expertise, knowledge, or even network connections to the business.
Why Should You Give Shares to Other Co-Founders?
To boost loyalty and commitment: Most start-ups in their early stages do not generate revenues. Even when they do, the income is usually not enough to pay salaries after deducting other expenses incurred by the start-up.
Consequently, giving shares is among the most common ways to motivate co-founders. The benefits each co-founder would receive by having these shares would determine how loyal and committed they would be.
Influences investors’ decision to invest: Equity split gives investors a cue on the co-founders’ engagement, solidarity, and relationship. It also provides the investors’ insight into how the CEO values their co-founders.
For instance, in a team of four co-founders, where the CEO owns 91% while others hold the remaining 9%, investors would most likely doubt the group, discouraging them from investing in the company.
Factors to Consider When Giving Shares to Your Co-Founders
While splitting shares equally among co-founders may seem fair, it should only be the case if all founders contribute the same amount, not just in the amount invested but also in time, knowledge, risks, and intellectual property. Where this is not the situation, it is imperative to consider some factors when allocating shares to co-founders.
Time & Commitment
Co-founders that dedicate more time to staying committed to your start-up should benefit from doing so, which should be reflected in the number of shares given to the co-founder.
Knowledge, Experience & Expertise: Importantly, start-ups are about execution, not ideas. Ideas alone do not create a successful start-up. Considering the knowledge, experience, and expertise is crucial when giving shares, as these are vital to keeping the business alive.
A co-founder with these skills will likely produce results and prevent your start-up from possible trouble.
Responsibilities & Duties
The responsibilities and duties of each co-founder should also be considered when giving shares because more responsibilities require more skills, workload, and stress.
Money invested: It is also essential to consider the amount invested when giving co-founders shares. More money should mean more shares.
Risks
In deciding the number of shares to be given, evaluating the risk, each co-founder will be exposed to in running the start-up is necessary. The risk should not be limited to just financial risks but should also include personal risks.
Tips for Giving Shares
Have deep discussions with your co-founders to ascertain what each co-founder brings to the table.
Set a vesting schedule: Co-founder vesting is a mechanism where founders earn ownership of a company’s stock over time.
Usually, the co-founder vesting schedule is set over 48 months, equivalent to 4 years, where 1/48th of the shares are vested every month.
Draw a cap table and review the cap table regularly: A cap table, also known as a capitalization table, is a spreadsheet that shows equity ownership.