Splitting Equity

The subject of startup equity distribution is one that seems to generate a lot of interest. Mine was piqued again by James Altucher's brilliant article on The Ultimate Cheat Sheet for Starting and Running a Business. I wish I had have written this one line, "The rules are: I'm going to give no explanations. Just listen to me." It's a masterpiece. If you want to start and run a business and don't have the time to read this article just stop right now. It's that good.

My suite neighbor John ripped on the post and one of his favs was also mine. Number seven.

How much equity should you give a partner? Divide things up into these categories: manage the company, raise the  money, had the idea, brings in the revenues, built the product (or  performs the services). Divide up in equal portions.

It is a little unfortunate that James used the word equal portions. Just listen to me. Equal is bad. But I am going to use a hypothetical to highlight what I believe James was saying.

Imagine it is early 2015. Both Accelereyes and nCrowd are setup for exits. Gonna happen. John and I are hanging out on the yet to be built roof top of Atlanta Tech Village for Friday night happy hour and start talking about what is next. We get in this quite intense discussion about how we can leverage the GPU and camera functions in computers to determine what consumer offers on a web page are most enticing in real time and sell this to local advertisers to create more efficient online marketing campaigns (I made this up on the fly, just accept it.) 

It is our idea. The two of us. We each get a share and start working on seeing if this is real. It is.

Several Friday night happy hours go by and somehow or the other I am able to convince John that I am a better business guy than him. That I should focus on running the business. One share for me.

John agreed to let me run the business because he knows that he is much better than me at all things technical. He is going to build the product. He gets a share.

John and I are each going to stroke a check from our anticipated exits, but this is a big idea and we are going to need more. He is going to be deep in product development. It is my job to go get the coin. I get a share.

About the same time as all this is going on some BLiNQ Media sales friend decides to get out of Gannett and join our new venture. One share for her.

So at this point there are six portions. I have three. John has two. And the sales lady has one (and she gets paid nice commissions). 50%, 33%, 17%. Not a bad starting point for a more serious discussion about equity split.

Not equal but equal portions based on the division of labor.

September 10, 2013  |  Comments  |  Tweet  |  Posted in Entrepreneurship, Startups