When it comes to splitting the company, equal is not always equitable.
Do you and your co-founder have a 50-50 (or 33-33-33) equity split? If so, it’s probably for two reasons: one, it’s simpler, and two, you may believe, as most people do, that equal splits are generally the fairest. However, equal equity splits are not always the best thing for a company
because they often favor one founder, which can lead to disputes later. The rule of thumb is, the equity split should as closely as possible approximate each founder’s relative contributions, both
past and anticipated, to the venture. This includes cash contributions, time contributions, other
contributions including IP, business contacts and physical assets, and each individual’s opportunity costs in pursuing the venture.
If you haven’t already, sit down now with your co-founder and discuss each of your past and future contributions and try to come to an agreement about a fair equity breakdown.
Equity battles are one of the most common reasons for startups to fail, and for that reason, investors will scrutinize the equity split of a company they are considering. So even though it may be tough to work out a breakdown that represents each individual’s contribution, it’s an important investment in the future stability and success of your company.
