On what basis should we split up the percentages while doing partnership?
I am founding 2 enterprises on partnership basis but we haven't decided any percentage of ownership shares till yet.
In one enterprise we are 4 persons and in other we are 3.
In first one I am incharge of all marketing and branding activities while in other one I am founder and CEO.
What you guys suggest? On what basis we should split up ownership shares?
There are a lot of factors to consider:
How much cash, time, expertise, ideas, value each person brings.
Another question is why have you decided on a partnership. In my mind, If I am starting a company, I will have control. 98% of the time the person who is putting in all the work, time and money is not happy with a partnership.
My Approach. Crreate a Share pool of 10 million shares that the company owns, and give out an approriate amount say 14-25% to get the ball rolling. Then as things progress hand it out over the years based on what people have actually contributed in Time, Money and Ideas etc.
I have only scratched the surface but I hope its enough to help you realize this is THE MOST IMPORTANT DECISION YOU WILL EVER MAKE, next to the name of your company.
I'd be happy to help you to through both scenarios, I am not cheap, but neither was my 30 years experience that can save you much pain.
Greg Genge, MBA
Yes it is classical question. Would need more details, first of all the source and stage of initial capitalization for the company, anticipated subsequent investment rounds, whether you are going to be seeking outside investors. If so, what kind of investors (debt, equity, fam & friends, venture capital, angels, etc.). If you are ready to assign ownership portions, *the real contribution and value of each partner to the development of the businesses is the key* - who is indispensable, who is not; who is committing all the way, who is putting just a toe in the water. Generally everyone knows who the real founders are. It's not really subjective, but a lot depends on whether investors or third parties get a voice in this. Don't carve it in stone before you know the fuller picture -- it is hard to undo some decisions. Corporate organization comes into it - the legal entity should be selected to permit the financial operations the startup needs - so you can decide on shares vs options, immediate vs earn-out equity, and more. You shouldn't permit the startup to be crushed with too many expert voices though, whether those of lawyers, accountants or the money people. If you would like to talk about this more, feel free to contact me.
As the CEO, make sure you have a majority stake and give out equity with an eyedropper. Check out Quora or Google it for the multitude of articles that are out there.
As for the other opportunity, Non C-level members get 1-4% with heavy vesting options. Again, check out the articles.
I suggest you read my article on Slicing the Founders' Pie (http://www.innovationworks.org/toolkit/index.php/founders-issues/founders-pie/) & (http://www.innovationworks.org/toolkit/index.php/founders-issues/the-founders-pie-calculator/).
keep all the shares and only give them out on very definate performance milestones
I have to agree with Mike Moyer: your struggle is mostly due to trying to divide things before things even exist. You can have 100% of zero and it's still zero. Rather, you want the percentages (and really all compensation) to the amount of value created by that person. Suppose two extreme cases:
1) Everything is great now, but one of your partners needs to drop out in the future for whatever reason. At that point, that partner is no longer adding value and their percentage of ownership should necessarily begin to decline.
2) You divide 100% of the equity among the founding partners. Now you want to hire a great addition to the team. Where is the equity going to come from for that person?
Generally, you need to agree on something more dynamic in terms of ownership. Agreeing that means the initial split is really not worth arguing much over.
Great question Talha. I'd say it's best you get a lawyer to have everything down in writing right from the start so there are no misunderstandings later on. Best wishes in your business.
Thanks all experts for sharing your viewpoints.
Finally all of your answers helped and we've successfully divided ownership shares and we all are happy with it.
Thanks once again for support of you guys.
The best way, by far, is to use a dynamic equity split. This is a method that lets you calculate exactly how much each person deserves and adjusts over time to make sure it stays fair. Leo von Wendorff below is on the right track, but he is missing the changes over time. Don't worry too much about voting- startups aren't run by votes.
Each person brings different things to the table including time, money, ideas, relationships etc. All of these things has a value relative to each other. An hour of my time, for instance, has a value relative to an hour of your time depending on our skills and experience as it pertains to the company.
So, the right % at any given time is the relative value of my contributions divided by the total value contributed by everyone. Because my contributions change over time and the contributions of others change the % will change too.
I've written a book on how to implement. It's called Slicing Pie (www.slicingpie.com) I would be happy to email you a copy if you contact me at firstname.lastname@example.org
Ownership is usually split up by the amount of work and/or cash/equity someone brings to the company. In my experience the founder usually gets a bigger share and if everyone is contributing equally then the rest is similarly split. This idea works even if you are raising money but if you are also raising funds then there are other issues involved like how much of the company are you willing to give away for cash. No matter how you decide to do the split, please have a business attorney draw up the agreement for you because there are always conditions that unforeseen circumstances that they can account for (ie what if an owner dies and has a three year old child who they left everything to? Suddenly the three year old is a partner -- this is an extreme example but I've heard of similar things happening).
Here's a practical approach...
1. Count all the cash contributions to the business - since cash is king for most startups, you may want to give it a multiplier at your discretion.
2. What is the current market value of your labor and how many hours are you willing to contribute to the company without pay?
3. Other resources, such plant & equipment, etc - what's the value of that?
4. The intangibles might be harder to measure, such as network, specific expertise, IP, etc. You can make this a silent vote. Everyone writes down what they think it's worth and then take the average.
Add that all up and calculate the percentage - this should give you a good reference point to start. ...and don't forget to include a "reserve" ownership for investors and/or future contributors.
While I would not make this the final and binding way of determining the ownership shares, this is a good exercise to go through. It will give your group a greater "buy-in" thus harmony when it comes to ownership - compared to dictating the ownership.
Putting aside the money/reward side to owning shares, it is more important in my mind to ensure that voting shares are distributed in a way that ensures there cannot be a combination of votes which amount to a total 50% voting yes and 50% voting no on some issue. This has the potential to rip a company in two.
A company of three is easy if it's 33.3% each and you're happy with the financial aspects of that.
A company of four is more difficult, an equal 25% split would be a disaster. The founder/CEO should have at least 51% to start with, to ensure the decisions which support his/her vision are given priority.
This is the very question that stalls and chokes so many businesses before the first product or service is sold.
I think in revenue and always as each owner, co-owner, partner and the rest: what percentage of your skills to this business will generate recognized revenue. That's the first question.
Second question: if a business entity is 100 percent and 51 percent of the business is wholly owned then the distribution around allocating 50% of shares across 'x' number of members, what percentage of that 50% will the principles be comfortable with?
In my mind the forecast and committed answers from Question 1 and the desired/required percentage distribution equals a fair and equitable allocation based on performance.
I certainly hope this helps you to think from a performance/contribution revenue recognition perspective, Talha.
Hello Talha. Each situation is different but we have a bunch of resources that can help you figure out how to split up equity: http://www.mosaichub.com/resource_center/equity/all