Mihaly Daranyi (DTalent)
February 21, 2022
Equity sharing is one of the scariest milestones in a startup lifecycle. Startup equity refers to the degree of ownership stakeholders have of the company. It defines the value of shares that founders, investors, and employees are issued. Several problems can easily occur in case deciding the exact percentage of the ownership between the co-founders is not executed properly.
The risk of conflict of interests and team breakups is extremely common in that stage. In addition to that, defining the shares of equities can be time-consuming where several other factors (e.g. intention to get external investment) can influence the process.
With the right amount of preparation, and using the following technique, the risk of conflict can be reduced significantly in the co-founder team. If you decide to do the equity sharing process as effective as possible there are two main principles, you need to pay attention to:
1. See the whole process as objective as you can and try to eliminate any subjectivity
2. Quantify everything possible
But how can you implement these two principles into practice as a founder/ co-founder? Here's our guide on how to distribute equity for you startup.
First and foremost, make sure to ask your co-founder mates if they have any preferences, opinions, or ideas regarding the equity sharing process and try to implement every feasible new view in the planning for the equity sharing meeting.
Secondly, prepare the negotiation to be objective, effective, and comfortable for every stakeholder in the process with the following steps:
Collect all the relevant aspects that could be the base of someone’s share in the startup, for some examples:
■ Working hours in the project
■ Future plans regarding the start-up
■ The level of individual risk-taking (if you have quit your job to be a co-founder, your risk-taking level is quite high.)
Right after you finish the collection of the aspects, the next important step is to decide on which inputs are relevant and usable, and which are less a good fit for the negotiation -with the consent of your co-founder mates.
Later on, when the aspects are relevant, objective, and agreed upon by everyone, you can start to assign weights to each of them. With the help of the weights, everyone can indicate which aspects are meaningful based on their opinion. Preferably a weight for every aspect should be between 1-10.
Hurray! Now you have a list of objective aspects, weighted by their importance! All you need to do in the next step is to average the values of the weights. (For example, if there are5, 5, 10, 10 values for one aspect, the average value is 7,5 based on the team evaluation.)
Now you can sum up the averages to set up an aggregated value that represents the total dividable equity. (For example, if the summed value is 100 points for all of the aspects, and there is one item with a 7,5 value, it would count 7,5% of the total equity distribution between the co-founders.)
After these steps, every team member should give consent to the equity sharing model.
Thirdly, you evaluate each other and yourself as well! During the evaluation:
■ You give values between 1-10 in every aspect of others and your performance.
■ Next, you aggregate the votes and everyone gets the average of the given values for every aspect.
■ Based on the aggregated values every co-founder receives a percentage of the share for every aspect (but only out of the equity assigned to the given aspect).
■ At the next step, you can aggregate the percentage of shares into one final share value.
Finally, you start the final negotiation about the percentages. After everyone got their share, you can have a final negotiation to which every founder gave their consent. If everything went smoothly, a vesting plan should be prepared as well.
If you want to try the above in real life, we have good news. DTalent, a startup team that created a unique skill-based talent management application, has created a system that can provide concrete and practical help in determining equity.
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