Let’s first discard the notion that this company is yours. It isn’t and won’t be. Every enterprise is more than one person. From the beginning, this company is dependent on others. It is not an extension of you, and you are not going to be the master of all domains. In fact, you might not even be the CEO if the typical CEO skills don’t match your best qualities. From the beginning, this company is a team.
Many founder teams are friends and already have a close relationship. They may even have marital or blood relations. Enthusiasm and excitement eventually run straight into the issue of equity. How will this group of enthusiastic folks divide up the equity?
This background can impede the necessary discussion. Often an egalitarian focus drives a plan for an equal split of ownership. If there are three founders, a one-third split is chosen as the solution to least likely ruffle feathers but may lead to problems down the road such as the following:
- What happens if one person loses interest and fades away?
- Do they still get one-third of a company that they aren’t contributing to?
- What if the founders disagree? Does every decision require that two folks agree? How will that impact the third person?
A fair distribution among friends can be problematic. Other questions challenge a team of “equals.” For example, will the stake of the CEO be the same as the person who is in charge of sales? In the beginning, the sales position may be pretty easy, and the CEO is pushing hard. An equal split is inevitably going to frustrate the eventual CEO. If the CEO’s role is demanding and stressful, shouldn’t that person get a larger equity stake?
When you play out these and many other scenarios, it is clear that an equal division is a foolish idea. But that often doesn’t overcome the fear of breaking up the team or that façade that “money doesn’t matter.” So what can the team do?
The best strategy is to agree to divide up equity later once roles and responsibilities are defined. That retention of equity must depend on a long-term commitment. You can keep the “we’re all in this together” vibe and, at the same time, establish a plan that will serve your needs going forward.
The second issue is one of skill and relates to the initial concern. If everyone is a friend, do they have complementary skills to launch a startup? Assuming the choice of founders was based on friendships or familial relationships, probably not. Perhaps you have a team of MBA students, or everyone is 25. Maybe no one has ever been interested in sales or finance. In the worst case scenario, everyone is a “leader.” If so, you can assume that eventually there will be a fight to see who is going to be king of the hill and grab the top CEO position.
Look at the skills and talents and find the holes. You’ll need to fill those holes quickly. Be ready for the reality that the people you choose are going to want equity or a decent salary. It’s unlikely you have a salary that can compete with real-world jobs with competitive wages, offices, and fringe benefits. Be ready to give up equity.
In sum, it’s okay to start with a homogenous group. But eventually, you need a heterogeneous team of people who get along. With such a team, when the times get tough, you’ll have the camaraderie and the skills you need to weather a financial storm and succeed going forward.
- Herrenkohl Eric. How to Hire A-Players: Finding the Top People for Your Team—Even If You Don’t Have a Recruiting Department. Vol 1 edition. Hoboken, NJ: Wiley. April 12, 2010, ch. 1.
- Lahm Robert J. Starting Your Business: Avoiding the “Me Incorporated” Syndrome. EzineArticles. October 18, 2005.
- Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 4.
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