Four Factors to Analyze Initial Equity
“How should we divide up our equity stake?” “What is the right amount of equity I should be receiving?” “My partner wants 50 percent of our company, is that too much?”
These are among the more common questions I get when advising companies and young professionals in new ventures. Certainly, the answers depend on many variables; however, it is important that all of the major stakeholders feel like they are being treated fairly and that they are all properly incented to row in the same direction. The following factors all play an important role in determining how to allocate initial equity.
- Relative contributions to the team. It is important that all co-founders objectively assess what they have contributed to date (financial, sweat-equity, technical expertise) and what they plan to contribute going forward. Clearly, someone who has contributed significant capital will expect a significant equity stake. Likewise, someone who has worked hard getting the company off the ground will expect meaningful equity, especially if you expect them to keep working.
- How important and/or (ir)replaceable are your contributions. If you have significant experience in the company’s niche or if you fill a void that is difficult – or expensive – to replace, then you are likely worth more to the company going forward. Examples include attorneys, industry-specific engineers, and software developers. Of course, financial capital is the least replaceable, and often the most important, contribution.
- Positions within the company. Top executives who are eating, sleeping, and breathing the business typically should have more skin in the game and thus should have a greater equity stake compared to non-executives.
- Who had the idea, and was the idea novel. Whoever came up with the idea to start the company should be rewarded with meaningful stake in the company. This is even more likely to be true if the idea for the company is a new one, rather than a recycled version of an existing idea.
Remember, the most important factor is that all of the major stakeholders should feel like they are being treated fairly and everyone should be incented to row in the same direction.
We can assist with helping you find a fair solution. Additionally, we can help you run the numbers to help you assess, based on your current business plan, the future projected financial value of a current equity stake.
For assistance with resolving equity disputes, or with any other legal needs related to your business or estate planning, contact Fournier Legal Services at firstname.lastname@example.org or 860.670.3535 now for a free consultation and planning session.
Joseph E. Fournier is an Attorney and a CPA who has more than twenty years of experience in a variety of business legal matters, including start-ups and company formations, drafting shareholder and operating agreements, contracts, employment law, commercial litigation, tax planning and audit defense, and mergers and acquisitions (M&A). He also handles estate planning matters, such as business succession planning, wills, trusts, and probate.