Equal Equity Split or Should You Have Vesting Options?

When you start up a business with a team, one of the things you must decide with your team is how to split up the founder’s equity. The temptation is to simply split everything evenly, and while that works for many startups, there are a couple of things to consider that may change the equation. Three of the major considerations are: 1) who came up with the idea; 2) who is putting up the money; 3) who is putting in the work.

Obviously, there may be an equity premium for coming up with the idea the business is founded on. If one person was solely responsible for coming up with the idea, it may be reasonable to compensate him or her with a little more equity than other members of the team to reflect the fact that the idea was originally his or hers. Of course, it is important to distinguish between one person coming up with the fully-fleshed idea, and one person coming up with the beginnings of something that is later refined and honed by the team.

If one or more members of the team are bank-rolling the company, they may be entitled to a greater share of the equity, especially if they are also putting in “sweat equity” into the company. The kind of work each person puts into the company also may affect their equity share — are they working part-time only or are they putting in 70 hours a week? are they working on all aspects on the company’s operations or just one or two? are they doing more tangible work or are they contributing more in an advisory or brainstorming role?

Finally, you will also want to consider each person’s commitment to the venture in determining equity shares? Are they likely to want to move on in a year or two, or are they in it for the long haul? To that end, you may also want to consider implementing vesting equity for the founding team, which will allow team members to actually receive equity only after working in the company a certain amount of time. You may not want someone who left the company months or years ago to have the same amount of equity as the people who have been working on the company all along. Additionally, you may want to distinguish between team members who are the actual founders of the company and team members who are really employees; in order to avoid the issue of “too many cooks in the kitchen”, you may want to consider creating a different class of non-voting equity for those team members who are in reality employees of the company.