Dividing Company Equity Judiciously Is Crucial

There are numerous ways to divide company equity at startup. All of them have advantages and disadvantages. Here is one way to do it.

The first thing you need is partners you can trust. Without them, there isn't any contract or legalese in the world that will make things work. The partners need to want to have things work out.

The next decision that must be made, after you have found partners that you can work with, you must make is to determine how much of the equity each partner receives. This can be difficult, especially if you have never divided up equity before. However difficult it is to determine if one person is more valuable than another, it must be done. If the equity isn't divided up at startup, it can cause you to eventually lose some of your best people.

The most obvious solution is to divide the equity up equally among all the partners and then negotiate new equity when new shareholders are brought in. An equitable division is often the least conflicted and easiest solution. Things usually have a way of working their way out and many times the partners will be happy with this resolution. However, this is not the only solution.

There are times when an equitable division is not appropriate. There is at least on company who has figured out a way to distribute equity using an algorithm that was designed for just that purpose. The company and the partners were reportedly happy with the results.

It works by determining who in the company has worked for less than the standard wages for the industry over a two year period is and that is their contribution to the company. All of these real money investments are put into a spreadsheet and the percentage of equity that each individual receives is determined automatically.

Some of the personal agreements and considerations for each partner are that the algorithm includes:

There is no payback for employees who leave before their two year anniversary for stock options that are vested for over four years.

Angel equity is subject to the standard equity deal.

The earned equity is converted to a loan which is payable over N number of years, beginning on the Nth anniversary of the company for employee who leave after two years.

So there is more than one way to divide up company equity between partners at startup. It just depends which way you want to go about it.