“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.
Related Posts:
{ 4 comments… read them below or add one }
I need your assistance in the Remodelling business that we are doing within our family ( my dad and husband).I am desperately in need of advice, as I foresee some troubles coming. Could you pls helo ? I will email you the details,seeing your response.
Great post!
Would you mind elaborating a bit more on how you came up with the numbers in between the parenthesis of: Partner A ( 6% + 24% + 18.8%) = 48.6%?
Hi Jorge,
The calculation for the figures in the parenthesis is listed below:
1. Money: Partners decided to allocate this component a 18% weightage and split it equally among themselves. Thus ( 18% x 0.33 = 6% ) . This is the first figure in the parenthesis for all partners.
2. Time: Partners decided to allocate this component a 48% weightage and split it 50/30/20. Thus you get ( 48% x 0.5 = 24% ) This is second figure for Partner A. Likewise for Partner B and C it would be ( 48% x 0.33 = 14.5%) & (48% x 0.2 = 9.6%)
3. Experience: The partners decide to allocate this component 34% weightage and split it 55/25/20. Thus you get ( 34% x 0.55 = 18.8%) This is the third figure for Partner A. Likewise for Partner B & C it would be ( 34% x 0.25 = 8.5%) & ( 34% x 0.2 = 6.8%)
Allocating weights to the key components of the equity split is subjective. This would wary depending on the type of project that you are undertaking . In the example above a consultancy will allocate greater weightages to time and experience since it doesn’t take a lot of money to start one. However the figures could be skewed the other way for a capital intensive project.
I hope this was of some assistance. If you require further clarification or advise for your particular example please either email me or contact me on twitter @usmansheikh. Thanks
This is a fascinating formula and I am trying to figure out how it might work for my firm. I am trying to find a fair “equity” split for a start up renewable energy firm, that is seeking an investor to invest ~ 1 Million dollars so we can commercialize our product. 4 Partners are in this “team” with two partners being the “founding fathers” Partner #1 (Founding father) has the patent on the technology and is very “hands on” and has also put in the most “seed” dollars towards the effort, he contributes and works in the company daily- despite holding down a FT job. Partner #2 was more hands on in the beginning, and just offered “intellectual” capital from a Business Development /finance perspective, but is not active on a daily basis- He has a FT job and will just act as an advisory equity partner moving forward as he has a FT job apart from this venture . Partner #3 (another founding father) was active early, on- hands on in manufacturing R&D etc, and has contributed some funds but is not involved on a daily basis. Partner #4 (me) has been working Full time in the company moving the company forward since October 2009- building infrastructure, connecting and networking, building web strategies, implementing PR efforts etc. Preparing Business Plans, etc moving the company towards the point that we can actually market the product. I intend to continue to work in the company FT as it grows. We are currently looking at an equity split for the 4 partners, taking into consideration the need for an extra investing partner (partner #5), which is why we need to finalize this split process as we will start seeking investors. Partner #1 wants to have a salary so he can continue FT in the company and further the R&D on the product. Partner #2 also wants a salary so she can work FT in the company and continue to build it out and generate sales/revenue for the investor. So I was thinking we needed a split structure that addressed all 4 being “equity partners” as well as a Split to allow for partner 1 & 4 to draw salaries. Any suggestions are highly appreciated.