So you’ve decided to start a business with a partner but you’re not sure how to fairly split equity. On today’s ASBN show, George Deeb, the Managing Partner at Red Rocket Ventures, shares his recommendations and best practices for splitting equity ownership between startup founders.
Three recommendations from Deeb address the contentious issue of equity sharing among entrepreneurs. First, he advises considering the entrepreneur’s role in the company, particularly if there are multiple investors. The second is whether you intend to work for the company and receive a cash salary. Then finally, are you investing cash in addition to time in your executive role?
More: What are the benefits of a private equity backed franchise?
According to Deeb, “your overall equity position is dictated by your seniority within the company.” In other words, if you were to give cash incentives along with equity to each senior executive team member, it would be in the five to ten percent range for each significant member.
The overall equity of business returns is equal to the standard cash-pay wage of a regular employee plus the value of cash investments. Capital cash investors are not any different from those who invest in cash. According to Deeb, “your company would get a similar percentage and similar protection as a conventional capital cash investment from whatever cash a newly employed executive investor would get.
Deeb mentions taking into account a few key aspects, such as:
- Who formed the team- in order to share equity appropriately in relation to premiums?
- Who or what had the original idea(s)?
- Who did the legwork to organize everything?
Then he continues, “Anything above and beyond a typical employee contribution that adds value or elevates the organization should earn either a greater equity range or premiums.
On the other hand, Deeb contends that you could support choices for upfront reimbursement when investing money in the business. In addition, implement a payment plan for investments so that normal employees can retrieve their equity. In terms of numerous owners, equity is typically the value of a relative base; for example, if four people invested equally in the company’s development, the shares would be divided into four.
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