eoincostello

Some thoughts on early stage equity splits

In Advice for Start-ups on December 28, 2012 at 6:03 pm

Business is a random walk and the only way to win is to prepare for multiple scenarios at an early stage. At the start-up stage enthusiasm is high and the pressure is on to “get things done”. Sorting out the share capital amongst the founding team may feel like a low priority but it is a high cause for the failure of teams in the first 3 years.

Seed capital refund is based on the percentage of the business you have so it’s important to avoid early dilution.

Sit down with the potential team/shareholders at the start up stage and do up a 3 year plan that deals with the questions as to:

1. Who is driving it.

2. Who makes the ultimate decisions.

3. Who controls the bank account

4. Who does what, itemise the roles and individual responsibilities.

Titles matter, the controlling shareholder on many occasions be the CEO.

Many people commencing a start-up bring the same set of rules to the start ups as they do to their personal, romantic and work relationships however business is different. Integrity is important however trust sometimes only goes as far as what is written on the agreement (which is why it is important to have one).

The worst scenario is 50/50 split between the founding partners, as I found in my experience this can lead to futile competition leading to status quo and lack of leadership. Even if you agree 1/3 each split one person needs to be driving the business.

My advice is to always sit down at a very early stage (before the company is registered at the CRO) and write down your vision for the next 3 years under the headings –

  • Individual Roles and Responsibilities
  • Cash prepared to invest and leave in the business for 3 years
  • Desired  personal outcomes
  • Personal goals (what you want out of the business in terms of salary, hiring authority etc).

Then swop your replies and compare notes – then scan them so that you have a permanent record 🙂

 

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