So I’m currently in the process of building an app with my four good friends, and with that, of course, is the awkward “who’s getting what” negotiations. Now, it’s easy to say split it five ways, but that’s not always the most fair, especially if one of the other partners isn’t pulling their weight. Equity dividing is an inevitable part of starting up, the key is to get it right.
Thank you Mike Moyer, author of Slicing Pie, for guiding us early stage startups in equity-dividing success. Here are some of Mike’s top tactics before slicing the startup equity pie.
Lawyers and accountants are not your moral friends
Mike points out one of the biggest mistakes early stage startups make: hiring lawyers and accountants to solve their equity issues.
The problem? These people aren’t free. Lots of money is spent on legal and financial services for what Mike calls a “worthless asset”. Early stage business that have not gained traction or value are, in essence, worthless.
The solution? Spend the money on helping your company grow like marketing or product development. When your company has earned value, then start looking into the legal issues. Mark says it’s not legal protection that early stagers needs, it’s protection of the moral kind–understanding what’s right, wrong and fair in the beginning is much more important than legally granted rights to equity.
Fair and square
So when it comes dividing equity then, what’s fair? Mike says lay out a set of rules in the beginning and agree to them. These rules will set the groundwork for any future changes in your startup (and you know there will be many).
The problem? Startups tend to make two very big mistakes when dishing out equity: doing the dividing before the company is built (which can lead to major disagreements with deadbeat co-founders) or after the company is built (which can cause serious internal issues with the team).
The solution? Mike says follow the Grunt Fund model whereupon equity is allocated based on the value each person plans on contributing.
Time, money and expertise are a few of the most obvious contributions participants can make to a startup, and they all have different values. Mike says the key to fairness in equity is to agree on what these contributions are worth, and keep tabs on where they are coming from.
The bottom line– sharing equity is a moral issue NOT a legal issue (at least in the beginning). Setting guidelines and rules and sticking to them will help make your startup a more fair and trusting one and help eliminate any bad blood in the future. After all, says Mike:
“If you have to start your relationship with a legal contract, you probably picked the wrong partners.”
Check out Mike’s book Slicing Pie–he’s selling it a limited-time bootstrap price of $5. Sounds sweet to me.