The correct handling of equity allocation for founding teams is one of the more frequent issues that I hear from entrepreneurs. Determining what’s right, what’s fair, what’s bulletproof – all very difficult questions to answer. And unfortunately, there are no “right answers”. Every situation is different, every team dynamic is different, and every individual contribution is different.
Fortunately there are some great resources that are helping entrepreneurs make sense of this and to help them put a framework in place. A few Google searches will help point anyone in the right direction. Books such as Slicing Pie, online calculators, and articles from Lean Startup guru Eric Reis all provide some great guidance on this topic.
But none of them (at least in my initial observation) really set the stage for the way an entrepreneur needs to think about this. In most cases, entrepreneurs believe they are starting with a company and go about trying to figure out how to allocate 100% of the pieces of the company on an equitable basis.
My advice lately has been different. Instead of starting at 100% and trying to figure out an allocation, I’m asking entrepreneurs to “start at zero”. Everyone, including the founder(s), are then receiving a piece of the company based on their relevant contributions. How equity is “earned” specifically is up to the team (using some of the aforementioned resources as guides), but with the psychology of “starting at zero” there could be fewer cases of mis-allocated equity and fewer battles among founding teams.
With this approach, everyone has to justify their contribution (whether its cash, sweat equity or other resources), and the entire team gets to agree on how equity allocation plays out over the long-term, not just based on the first few months of the venture.