Best Practices for Founders’ Equity

There are many decisions to be made with founder equity.

Here are some best practices in handling those decisions. 

The founder-co-founder split of equity can be anything except 50/50.

A 50/50 split leaves no one in a position to make a final decision for the company.

In splitting the equity between or among the founders, consider the business needs first. 

What skills and experience must be brought to bear on the business?

Who on the team will be responsible for each aspect of the business?

Put this discussion on the table early on.

Have an open and frank discussion among the founders about what each team member can contribute to the business.

It’s important to vest any equity offered so a founder leaving early doesn’t take an outsized number of shares.

Consider the tax implications and use IRS tax code 83B which gives the shareholder the right to pay tax on the options issued rather than when they vest. 

Consider whether or not to buy back the shares of any founder who leaves.  

This could be expensive for the company.

Gain agreement on the growth strategy of the company.  

Will it grow organically over time or will you raise funding to accelerate it?

Organic growth takes longer but offers less dilution.  

Funding will speed up the growth but will reduce the founders’ ownership stake.

Alignment in the growth strategy is important for founders and co-founders.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.