Equity Split to Maximize Motivation

equityWhen deciding how much equity split to give to a co-founder, your goal as CEO is to create a split that will maximize motivation. The amount of equity you give to a co-founder will determine the amount of work and energy they put into the start-up.

1. Its about what your co-founder wants

According to Michael Siebel, a common mistake  founders make is coming to the terms of the equity split based on negotiations. You should be thinking about what your co-founder wants, even when they lose sight of their long term interests  It is normal that founders are hesitant in being generous with the equity split.  However, by  implementing methods such as a vesting and cliff period you should have no problem in gaining the trust of your co-founders.  A Vesting period is when an employee only receives partial benefits gradually over a specific period. A cliff period is when the employee only receives the benefits after a specific time.

2. Using a 1 year cliff with 4 year vesting

Most co founders do not understand the long-term time commitment that is a start-up. You need co founders that you can trust to be there for a long term period. That is why by introducing a 4-year vesting with 1-year cliff, you can guarantee their loyalty to the start-up. Even if they leave they will not be entitled to their full share of equity. A 4-year vesting period with 1-year cliff means that the co-founder will only begin receiving their equity stakes 1 year later. After the 1st year, the co founder can receive a quarter of their equity share every year for 4 years. They are only entitled to their full shares once they dedicate at least 5 years to the company.

3. Long term commitment

By implementing this hedge, you do not have to worry about choosing the wrong co-founder. You will have at least 1 year before they can receive any of their shares. After that, the co-founder will only receive their full shares of equity if they committed 4 years to your start-up. This is a minimum 5 year commitment which is enough time to grow your start-up. If they do not agree to the 4-year vesting period with the 1 year cliff, it means they are not willing to commit and should not be a co-founder.

Once you have this hedge in place, it should be easier for you to be generous in splitting the equity. The co-founders will be entitled to their share once they commit at least 5 years with you. You want to make sure your co-founders are willing to put in the same amount of time and energy that you are. The equity split will be the motivation your co-founders need to get through any challenges your company will face. Having this trust between you and your team is key in order for your start-up to become successful. There is no exact number of what the equity split should be. it depends entirely on what expectations you have for your co-founders.

 

 

Email This Post Email This Post
This entry was posted in Co-Founder, Start-ups by Katherine Korakakis. Bookmark the permalink.

About Katherine Korakakis

Katherine has spent most of her life working alongside start-ups in various verticals. For 10 years, she was responsible for the development of entrepreneurial initiatives and projects under the auspices of the Youth Entrepreneurship Challenge, a Youth Secretariat program of the government of Quebec. She has authored and co-authored guidebooks on entrepreneurship education. Katherine first developed her passion for building businesses when she co-founded Glambiton. She was instrumental in the development of the first National Entrepreneurship Day for the province of Quebec. Katherine has served on the Boards of numerous non-profit organizations and currently sits on PMEMTL Centre-Ouest and EPCA. She sits on the investment committees of PME MTL Centre and PME MTL Centre-Ouest. These entities are the decision making bodies with regards to business financing with the city of Montreal. She currently is Manager of Entrepreneurship for ProMontreal Entrepreneurs (PME), an early stage VC fund and entrepreneurship program that invests in multiple verticals. The fund has a social business model and has been around for 20 yrs.

Leave a Reply

Your email address will not be published. Required fields are marked *