Distributing Shares Amongst Co-Founders
By: Natthapong Sasasmit (Lab Manager, Bangkok)
When working on your startup, it's inevitable that you'll come to a point to split share among co-founders. A strong co-founding team is vital for a business and it is an essential part of the investor's evaluation of a business (before making an investment). Although there is no "right answer" on how to approach this dilemma, I have outlined a few important considerations below.
Role in the company
Running a startup means you're working with Strategy, Operation, Tech, Accounting, Human Resource, Finance, Sales and many more teams. If you are a sole owner, you are responsible for all these functions in the early days. A good co-founder is valuable when they can offload some of these tasks away from you. If that person is taking care of the important function in the company, you might want to consider giving them a considerable amount of shares. In many cases you will find a scenario when the CTO is going to ask for a majority of the stock. But keep in mind, success of the startup does not only rely on the development of the product.
The Startup journey is a long and tiring. Most people work on a company much longer than initially planned. A significant share in a startup can keep your founding team motivated.
If you own more than half of the stock, then you can be in control of the company. If not, then consider how much you need to own in order to be considered a significant shareholder that controls the company. For example, if you own 25% then you are able to ‘veto’ some majority changes in the company.
Are you or your co-founder contributing cash to the company? If so, that should be taken into consideration too. Of course, not everyone has the capability to contribute the same amount of cash. It should be understood that cash contributions may be discounted from the share distribution.
If the co-founder who has the most shares is unable to commit full time to the startups how would the rest of the co-founder feel about it? Not only the founding team would question the commitment, the investor will too! If the commitment is not being rewarded as salary it should reflect in the equity.
You will not want to be in a situation where you have done all the hard work in spitting the shares then a co-founder walks away while still holding a big chunk of the equity. Consider using vesting. A co-founder would only earn their part of the agreed equity gradually. Normally this is done in a 3-6 years period, but it depends on the type of business you are in.
Don't go the easy route spitting the equity of the company. After all, as a startup founder it is your responsibility to always prepare for the worst case. Nothing is certain. Relationship can turn sour especially when the business does not go the way it is expected to be.