“Lets all split it equally”. There are many people who agree with this and quite a few who don’t. I am with the latter group. I have been part and am still part of ventures where equity has been split equally from the word go. If there is one reason why this is done so widely it is, ‘lets not ruffle any feathers’. The other train of thought is that since the company is only an idea right , lets see how it develops. I used to think that way too, until some of the companies I was with got reasonably big or some partners became way too complacent. Thats when I realized this doesn’t work.
Since we are creating a culture of being candid I think it should start from the word go. When looking at splitting equity there are a couple of factors to consider when doing the split:
1. Money to be invested
2. Time to be invested
3. Experience of the partner
So lets take an example:
Three partners are setting up a consultancy. The business requires substantial experience and industry knowledge as well as a large amount of time commitment. Looking at all the factors, they come to the conclusion that each factor should get a certain weightage; Money (18%) Time (48%) Experience (34%). All partners decide that they should split the investment money equally. Time wise the split would be 50/30/20 and experience wise it would be 55/25/20.
Thus you would get:
Partner A ( 6% + 24% + 18.8%) = 48.6%
Partner B ( 6% +14.5% + 8.5%) = 29%
Partner C ( 6% + 9.6% + 6.8%) = 22.4%
Allocating weightage to each of the factors can be mutually decided by all partners to be set equally or using a range of values. I feel this brings more fairness into an equity split and puts pressure on those individuals with greater shares, to deliver more to the team.
There are many permutations which could be added to bring a greater level of equality among the shareholding when time is being spent equally by the partners.
This model should provide a starting point to bring more objectivity into the equity splitting process. If you have any questions please let me know.