You have a great team, a killer product under development, and enough brains to know that you need to form a company. You need a company bank account, an entity to own the intellectual property, and that insulation from personal liability that you’ve heard about.
Now you have to divide the pie. Who will be an owner of this new company, and in what percentages? If you can organize your initial cap table logically from the beginning, you’ll be in much better shape moving forward.
Equal Isn’t Always Fair
The starting point for many founding teams is equal shares. Two people, 50/50, or four people 25% apiece. It’s easy and it’s obvious. But it’s not always fair.
Some people will do a lot for a little while, some will do a little for a long while, and some will be indispensable for the duration. Some are bringing things to the table that you could buy cheaply as hourly services, others will be the mission and vision people that will make the decisions, build the products, and make sure that the company has a path to the market. Some will come in with wide eyes and high expectations, but nobody will know for a long time whether they’re able to deliver.
Giving away too much equity to supporting roles can come back to bite you later. Truly key people lose motivation due to the free rider problem. And trying to reduce someone’s ownership share later can be an invitation to upheaval and legal claims.
You can and should think about vesting and reverse vesting to hedge these bets and allow for changes over time. But regardless of vesting schedules, the initial question remains — who owns what on day one?
Things to Think About
Consider these factors as you divide the pie for the initial equity among co-founders:
– either cash or in-kind contributions already made
– each person’s time and attention they are realistically able to commit to the new venture
– sustained contributions to date
– necessity of each person’s skill set over time, not just for the initial few weeks or months
This will get you to an initial cap table (the list of who has what pieces of the company pie) that you call can live with for the founders’ era of your company.