Cofounders of startup companies face many decisions. One of the most pressing decisions that cofounders must make during entity formation is whether each cofounder should get an equal number of shares. While 50-50 is a perfectly acceptable manner in which to divide the company’s equity, that construct may not be fair to every cofounders. The fairest or most equitable manner to distribute shares may be placing a value on each cofounder’s contributions to the company. Regardless of the method, it is the cofounder’s decision as to the distribution of equity. The decision must be made with careful deliberation to avoid serious quarrels, and possible litigation, if one or more cofounders feels slighted. The California business attorneys at Startup Company Counsel can guide you through the process of equity distribution at the inception of your company.
Equal Equity: 50-50 Split of Shares Among Cofounderss
A company that has two cofounders who stand on equal footing can get by with a 50-50 division of the equity. An equal equity division will suffice if each person brings the same monetary investment, skills, and time contribution to the table for the benefit of the company. This arrangement could work nicely for friends or family who decide to go into business with each other. This arrangement can also work for complete strangers who are more concerned about bringing a product to market or more concerned with the creative process than the business aspect of it all. An equal division is easy, efficient, and ensures that each person is treated the same as the other. The added benefit to that is neither person holds the majority of the equity, and therefore each person enjoys equal control. While there are benefits, there are significant drawbacks to an equal split of entity.
A major problem with equal division of equity is that each cofounder brings something different to the company. One cofounders may be the stronger salesperson, and the other may be a more creative innovator. One cofounders might have credibility with investors because they have previous success starting and growing companies. Perhaps one cofounder simply makes an initial cash investment but cannot contribute time to the company. Another cofounder might have more time than other cofounders and cash to contribute to the initial investment. The company’s equity can easily be divided equally among those individuals if all agree that each person’s contribution is worth the same as the others.
Contributions Split of Shares Among Cofounders
Commonly, however, entrepreneurs do not weigh each cofounders’ contribution equally. There might be greater value to the company to the cofounders who has credibility with venture capitalists to secure financing for the company. That financing may mean expanding payroll to obtain or retain talented employees. Financing may mean expanding manufacturing capacity or investing in new equipment. The cofounders who brings that credibility to the venture is highly valuable.
Ultimately, a cofounders who put in most of the work should receive a greater share of the equity. The cofounders who works full time for the startup should be rewarded with a greater equity share. Cofounders who genuinely want the company to succeed but cannot contribute full-time for one reason or another should not receive the same percentage of shares as the cofounders working full-time. The exact percentage attributed to each function and investment is entirely within the province of the cofounders to determine. Cofounders should discuss and agree on valuation early on in the company’s life cycle. Otherwise, the conflict could ruin the company before it even gets off the ground.
California Business Attorneys with A Reputation For Excellence
The corporate attorneys at Startup Company Counsel are knowledgeable business lawyers who understand that there are many steps on the road to corporate success. Don’t let distributing shares among cofounders hold you back. Whether you have or have not thought about this process, or already have a policy in place, the California corporate lawyers at Startup Company Counsel can help you establish and validate the distribution of cofounders’ shares. Contact them today at 408-441-7555 to discuss how they can help your company divide its equity fairly.