Initial Equity Sharing Agreements
I’m always interested to learn how new companies decide to initially share equity. At AccelerEyes, we originally split equity evenly among four co-founders. As some of those co-founders have left, equity sharing shifts percentage-wise more heavily towards those that stick with the business. This has worked well for us.
This week I had the opportunity to speak with a new entrepreneur and ask about his equity sharing arrangement. In his case, there are two co-founders. The first is providing all the cash for the new business to operate (including a salary for the second co-founder) and working a few hours a week on the business. The second is full bore working on building the business.
These two co-founders decided that the first guy (the investor co-founder) would have the lion’s share ownership percentage (currently at 80% ownership), while the second co-founder would start at a lower equity amount. Then, as the business becomes successful (due manpower efforts of the second co-founder), the second co-founder would rise from 20% ownership to 33.3% ownership. The 33.3% ownership is a cap at which the ownership shift will stop. The two co-founders chose $10M in revenue as the milestone to hit the 33.3% cap.
These initial agreements are always interesting. Later on, other equity sharing is often introduced via external investors and new hires. Those are covered under separate subsequent agreements.
How have you initially shared equity within your business?