Tips for Dividing Business Founder Equity

When multiple people are involved in starting and building a new business, it is very easy to overlook what seems to be a small, mundane issue: how to divide founders’ equity. But, if a bit of forethought is brought in at the beginning regarding the definition of ownership and the anticipated compensation that each of the founding members will receive, then it can save a tremendous amount of headache and heartache down the road.


There is no clear-cut, easily agreed-upon formula for dividing equity. Equal division among those who started the company may seem  to be the simplest option. Yet, it opens the door to resentment against founders who are viewed as less active in developing the business. Furthermore, while equal division reduces complexity, it does not fairly assess each founder’s work contribution. Dividing “fairly” demands greater reflection and serious thought about the value of various roles.

Among the factors to be considered are idea development, business plan preparation, marketing ability, and money contribution. Risk-taking, commitment, and responsibility also determine a founder’s value. The business’s founders have to take a nuanced look at these factors, and decide upon their worth. For example, the initial idea for a product or service is important, but useless if not developed or sold. Writing a business plan takes hard work, but it does not guarantee business success. Having many contacts improves one’s marketing prowess, but does not prove the sale.

Even when a founder provides technology or a clients, the value of each is not clear-cut. Perhaps the founder who raises business capital is more vital to the business. Likewise, a founder who quits a job to devote oneself to the new business might deserve more equity.

At the outset, deciding who will be considered a founder can be confounding. Usually, there are three main founding roles: the idea person, the marketing/business generator, and the CEO who can start and raise money.

When dividing equity, founders can expect to have heated discussions about the value of each one’s contributions. The following guidelines can help get the conversation moving in a productive way:

  • Implement transparency. Clearly outline performance expectations and evaluation processes. Well-understood goals and transparent decision will create an atmosphere of fairness.


  • Write an agreement. Don’t just talk about dividing founders’ equity, write it down. A written plan equalizes expectations, and can avoid arguments further down the line.


  • Delay incorporation. Before incorporating as an actual business, have the founders start working on development and sales. This gives each one a chance to prove his or her worth before determining the division of equity.


  • Hire legal counsel. Some might feel that there’s no need for the law among friends. Instead, founders who hire an attorney to represent them not only protect their own interests, but can extend the life of the friendship by avoiding future arguments.

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