Start-ups and Split-ups – Entrepreneurs and Equity

A typical start-up situation: an entrepreneur finds a business partner with complementary skills and, during the early days of growth, they decide to split future equity. Sometimes, this might be 50-50 but more often, the entrepreneur keeps a major stake.

The rate of growth is often restricted by available funding which, in turn, requires every member of the team to be totally committed – and the best way to do this is to offer equity in the Company.

Static Equity vs Vesting Equity

Static equity is to share a percentage of the company with every employee, regardless of their value to the company. Vested equity allows for a team member to prove themselves and be rewarded with a percentage of a share in the company’s success.

This is particularly important when negotiating with a dynamic, powerful appointee who may demand a high percentage share, say over 10%. You need to know that he or she can help take your company forward in a way that is acceptable to you. Equity-based compensation is best for long-term prospects therefore, consider staggering the award across three or more years. That way, if that person leaves after a couple of years, you have given away a smaller portion that, if agreed, may be re-purchased at a fixed price.

Energy vs Results

Whilst you may value energetic conscientious staff, the value of their contribution is what really matters. Getting results is far more important than working hard but not achieving.

Rewarding results over effort may seem harsh on loyal and willing team members but if the goals and rewards are clear, it will help your team prioritise how to best spend their time. The people who help to increase the company’s worth deserve to share in its success.

Be The Boss

Always be in control of your company goals, how and when they will be reached, and be transparent with every team member about what their job is. Make sure that they are aware of what you need them to do. For example, if the job is to sell or to manufacture, tell them that so that they focus their time on it. Allowing staff to generically multi-task is a distraction from their important role (unless their role is general office assistant) and nothing else counts towards their working day, their value and their equity share.

Equity-splits can go wrong and cost you – but not so much as never getting the company started in the first place. Striving for perfection will slow down initial progress – it will have to wait. You will make mistakes but worrying won’t help. Make it clear what you are paying for and how it is earned. Things are going to change so much that long-term legal decisions at this stage are a waste.

Alternatives to Sharing Equity within The Team

If your company has little need for human resources, you could use equity share as ‘currency’ to obtain financial investment or other services. There may be a local company willing to be your ‘growth partner’, investing capital and resources in exchange for equity share within your company. Vested equity should still be applied.

Even a small share enables an investor to make demands on you but this may be off-set by the gains.

Start up Funding

MIERA Consulting can provide introductions to Business Angels and Venture Capitalists. We are able to help entrepreneurs with researching initial ideas, developing a business plan, evaluating the business model and arriving at realistic financial projections – with the aim of getting the start-up venture ‘funding ready’. Contact us.

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