Advice on Equity

A friend asked me to help him think about how to split the equity in a company he was starting. His colleague is contributing office space and some key technology. My friend is responsible for where the business goes from here. I told him this:

If you apportion equity, you will certainly do it wrong.

That's because it's based on a snapshot, a moment in time.

Sure, today, your partner's share is worth 50% and yours is worth 50%. His because of what he did, yours because of what you're going to do.

But a year from now, that number can't possibly be right. You may have acquired six more pieces of software, raised millions, traveled the world, closed sales and sold the company. Wow. Or, you may have done absolutely nothing.

So, my best advice is to say, "Today, right now, your contribution is worth 5% of the company and my creation of the company is worth 5%. The other 90% is based on what each of us does over the next 18 months. Here's a list of what has to get done, and what we agree it's worth..."

And then make a list. Stuff like commenting and updating and supporting the code. Stuff like closing sales and hiring people and raising money...

Of course, you leave an out for unforeseen events and dilution based on bringing in new partners.

You may end up having small disagreements about how to interpret the list, but this sort of advance flexibility is well worth the awkward conversation it takes to get it started. Another tip: put in a clause appointing a trusted third party as an arbitrator, so small disagreements don't snowball into litigation.