More often than not, most startup founders agree on some sort of equity allocation very early on in the process. Whether it’s a 50-50 split among two, or a 60-20-20 among three, or some other variation, the first thing most founders contemplate when they’re starting a business is who gets what. But this conversation – particularly for early-stage startups – needs to be far more nuanced. Dividing 100% into parts among founders doesn’t begin to address the complications, needs, and challenges that startups face as they attempt to become a successful business. Here are just a handful of the complications that most startups face.
- The company needs money and the only way to get it is through offering equity to outside investors.
- Founder contributions are not commensurate with initial equity allocations.
- The company wants to bring on a new partner, and the person wants equity.
- The company needs to incentivize new employees with equity.
- One or more founders leave the company.
- The company decides to terminate one or more founders.
- One or more founders need to take a different role in the company than previously imagined.
These aren’t isolated or rare events. These scenarios are near certainties for the vast majority of early-stage startups. Failing to have ready mechanisms in place that will allow the company to quickly and easily accommodate these scenarios will impede the business and prevent the growth company from adapting to changing realities. On the contrary, smart startups know to expect these unknowns and contemplate the best way to deal with these problems at formation.