Time to decide who gets what. Here come the headaches.

By Shawn Smith,

Published on May 30, 2011   —   2 min read

It’s late on Sunday afternoon and I’ve reworked this post for about 4 weeks now. Its come along way (I think). I will say that I’ve got a lot of things going on today which are beating me down a little. However, there comes a point in the life of every entrepreneur (still not sure on the title thing, but you get the idea) when you finally have to decide who gets what. You'll try to put it off, as I have, but it will eventually come to head. As much as we've all tried to avoid the conversation, my team and I have arrived at that, possibly uncomfortable, place.

It's important to have a solid decision framework before you go into this potential firestorm. Most startups end up dissolving entirely over differences between the cofounders, and you don't want a good idea to go to waste when conflict could have been completely avoided. Before you even begin the conversation, get everyone to agree to a set of rules that will decide who gets what.

What kind of rules, hmmmm? I'm talking about the rules that clearly specify who is a founder and who isn't, rules that specify the value of an idea versus the value of the execution of that idea. If you don't have much experience with founding companies, it's a good idea to see what other entrepreneurs have done. I particularly like Dan Shapiro's article on the subject.

With Dan's system, nobody is compromising. Everyone knows their contribution, and it's much more safe. Imagine the following scenario. What happens if you split equity 50/50 and one of the cofounders loses his passion and stops working on the project? Now the person who wants the company to succeed is burdened by the person who is getting a free ride. Wouldn't it be better to give more priority to the person who is fully committed to the project? Shouldn't you trust your CEO with most of your shares?

I'm not saying everyone should copy Dan's system verbatim, but it does provide a nice framework. You might disagree with some of the percentages he allocates, but the basic principles are all there. If someone puts in more unpaid work at the beginning, that person deserves more shares. If someone has the power to raise venture capital, that person should get most of the company because she's removing a huge amount of risk.

You also have to consider when it's safe to pay yourselves with the revenue or financing you're receiving. Should you reinvest all revenues in the company first? At what point is it safe for you and your cofounders to quit your day jobs and start receiving a salary? If paying your rent and getting enough to eat depends on this, then paying yourself is a kind of reinvestment. In that case, you have to ask how much is fair.

However you do the split, there will always be bickering and arguing. That's just business. The point of all of this isn't to avoid the fights. It's to make them constructive, to base the cofounder equity split on legitimate business reasons, and most importantly, to make the future safe for your company. When you give all of the right incentives to the right people, you safeguard the company from a premature death. It might not be comfortable, but it's the right thing to do.

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