Many founder teams are friends and already have a close relationship. They may even have marital or blood relations. Enthusiasm and excitement eventually run straight into the issue of equity. How will this group of enthusiastic folks divide up the equity?
The above background can impede the necessary discussion. Often an egalitarian focus drives a plan for an equal split of ownership. If there are 3 founders, a 1/3 split is chosen as the least likely solution to ruffle feathers; but may lead to problems down the road
- What happens if one person loses interest and fades away?
- Do they still get 1/3 of a company that they aren't contributing to?
- What if the founders disagree? Does every decision require that two folks agree? How will that impact the third person?
So a fair distribution among friends can be problematic. Other questions challenge a team of "equals." For example, will the stake of the CEO be the same as the person who is in charge of sales? In the beginning, the sales position may be pretty easy, and the CEO is pushing hard. An equal split is inevitably going to frustrate the eventual CEO. If the CEO's role is demanding and stressful shouldn't that person get a larger equity stake?
When you play out these and many other scenarios it is clear that an equal division is a foolish idea. But that often doesn't overcome the fear of breaking up the team or that facade that "money doesn't matter." So what can the team do?
The best strategy is to agree to divide up equity later once roles and responsibilities are defined. And that retention of equity must depend on a long-term commitment. You can keep the "we're all in this together" vibe and at the same time establish a plan that will serve your needs going forward.
Look at the skills and talents and find the holes. You'll need to fill those holes quickly. Be ready for the reality that the people you choose are going to want equity or a decent salary. It's unlikely you have a salary that can compete with real-world jobs with competitive wages, offices, and fringe benefits. Be ready to give up equity.
In sum, it's okay to start with a homogenous group. But eventually, you need a heterogeneous team of people who get along. With such a team, when the times get tough you'll have the comradery AND the skills you need to weather a financial storm and succeed going forward.
- Lahm Robert J. Starting Your Business: Avoiding the “Me Incorporated” Syndrome. EzineArticles. October 18, 2005.
- Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 4.
- Herrenkohl Eric. How to Hire A-Players: Finding the Top People for Your Team- Even If You Don’t Have a Recruiting Department. Vol 1 edition. Hoboken, N.J: Wiley. April 12, 2010, ch. 1.