How to Divide Equity in a Startup and CAP Tables

by | 16 Feb, 2022 | Investment | 0 comments

This Article concerns entrepreneurs who establish a new startup. If there are multiple founders in your business there is a couple of things you have to consider on;

One is when founders issue the equity (when they establish a legal entity, a company), they tend to give too much credit for what got them there and not enough credit for what needs to be done in the future.

I will make it an example, I met lots of founders of 3,4, or 5 people team and they say “We are founders, we are equal!”. Those founders usually work together for a certain amount of time.

What I always ask founders is “Who is going to be running the company over the next several years?”. It is a simple and fair question because they will be sharing the responsibilities after incorporating the business. Someone will be a CEO and another person will be the Director of Marketing etc in this business.

All founders are not created equal and the person who will become CEO at some point will have to work probably 100 hours a week. At some point the person who carries that burden will feel resentful about the percentage of the share is equally comparing to the other team members.

For me, this is the number one reason for startup founders to argue and finally kill their startups.

Let’s have a look at what happens if one of the founders is left the business after arguing with the other founders?

Don’t forget that equity is forever. If you give equity to someone and they have gone after a year or years later. What will happen is when still working hard your ass off, the person you gave this equity stake is long gone but he/she is benefitting from all of your hard work!

This is why the social contract among the founders needs to be articulated. Someone who is not contributing to the business shouldn’t be able to keep all the equity that they initially granted if they leave. This is not a wanted situation because getting back this equity creates a cost that a startup never mind also it confuses the investors.

After searching how to divide the equity subject I came up with a conclusion and a methodology.

Before I tell you about the methodology I want to tell you the main topics to consider when dividing the equity.

Time Contribution: The least amount of time that you are going to contribute to the project.

Capital: Money is the king, who brings how much money?

Idea: Team and idea builders are precious. This needs to be rewarded.

Those three are the CORE. The next three come after those.

Execution: The idea owner may be worth but after operations started EXECUTION is everything.

Risk Taking: Some founders quit their jobs after founding the company. A startup is a risky business the reward must be higher for the risk-takers. If you don’t accept it don’t go to investors, because they are huge risk-takers.

Cost Cutting: If a team member is doing an extra business that is cutting the cost of the company it is valuable. To give an example to that creating content etc…

If the founders can agree on the above topics then they can easily calculate their shares in the company (Maybe not that easy but at least close to fair..).

What I am using in my consulting business is a survey that contains 23 questions. Those questions are about the above topics and carefully designed to understand who is going to contribute how much time and what will the responsibility of this person through the time.

I will continue this by explaining the CAP tables and calculations. So if you enjoy it please thumbs up.

Kaan Senol @VoyogerConsulting

Startup Investment & Modelling with Excel

Learn Startup investment by doing case studies. This ebook comes with a Cap Table Excel file. You can model and calculate the share dilution after an investment. Don’t pay thousands for a consultant!

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