Creating a new business structure around a partnership or multiple founders is one of the most single important aspects of starting a new business. Like a business plan, your corporate structure, how you allocate shares, profits and control of the new business will help determine the fate of your company as well as the company culture (anywhere from hostile to win-win). This is a relationship, or more accurately, a marriage (so the culture would be more like dysfunctional to loving). Like a marriage, I highly recommend looking to the end of the company or partnership as you create the beginning – like a pre-nup. Seriously. Have everything worked out to cover the end and you will be good to go in the beginning. Because you never know how the relationship(s), or company, will end – will you be bought out? Go public? Be taken over? Get investment? Change direction to one that not everyone wants to buy into? Dissolve? Will founders or partners or you have a change of circumstances that lead to a desire to end the relationship? Will someone die and you are suddenly stuck with a spouse as a partner? All this needs to be spelled out upfront, because once the horse has left the barn…well, you all know how that one ends.
When I speak to multiple stakeholders at the start of their company, I go around the room and point out a scenario where one person decides they want to take more control of the company – maybe because they feel they are doing more work, or contributing more value or whatever. And ultimately that leads to someone else being screwed. I’ve had co-founders come back to me later and tell me that the scenario I played out in the meeting was exactly what happened. So protect yourself and your partners BEFORE YOU BEGIN.
George Deeb in Alley Watch provides some helpful hints and considerations that should be taken into account about how to split up equity in a startup.