An equal split of shares between founders often seems like the fairest way to split equity in a young business. While this may be the simplest option, it comes with many hidden risks that most entrepreneurs are not aware of until it is too late and the business is in serious trouble. New companies can avoid this problem by working with an experienced startup lawyer from the very start. At Structure Law Group, we help entrepreneurs build a successful business from the ground up. Whether it is making decisions on your business entity type (i.e. choice of entity), your management structure, or your equity compensation, we advise and help design a company that is best suited to your unique needs.
Why Equal Split Of Shares Is the Worst Structure
There are many reasons why an equal split of equity can be the worst structure for the founders of a new business. Often, founders have different ideas about the contributions they will be making to the business. Some envision the creation of intellectual property, while others want to manage marketing and business plans. Some want an active role in the daily management of the company, while others want to invest more passively. These issues cannot be resolved in a single meeting. Often, founders must work together for a time in order to learn each person’s working style, expectations for each founder’s contributions, and vision for the company’s future. It takes partners time to know each other in a business relationship. And just as in a romantic relationship, legal agreements cannot always prevent painful and expensive litigation when the business relationship goes sour.
Second, many founders do not realize the future opportunities they are missing out on by starting with an equal split among co-founders. The Harvard Business Review reports that companies with an equal founders’ split have more difficulty procuring outside financing – especially venture capital. Most startups have a business model and growth plan that relies on outside funding of some sort. Without it, your startup can have a much lower chance of surviving. Starting with an equal founders’ split can cut off your financing options before you even start your business operations.
Famous Companies That Suffered From an Equal Split Startup Structure
There is no lack of horror stories about famous companies whose founders came to regret their initial split of shares. Facebook caused a multimillion-dollar rift between founders Mark Zuckerberg and Eduardo Saverin, which was made into a film that won three Oscars. Business Insider reports that their initial split was not equal (Zuckerberg owned 65 percent to Saverin’s 30), but there was a litigious split when Zuckerberg reorganized the company and diluted Saverin’s shares to less than 10 percent. Multi-million-dollar lawsuits followed.
Not all founder equity stories are made into huge Hollywood movies. Zipcar – a popular car-sharing service – started over a handshake. The Harvard Business Review reports that the two founders agreed to a 50/50 split over a handshake at their initial meeting. While co-founder Robin Chase initially thought this was an effective way to avoid disputes over ownership, she quickly found herself with a host of other serious problems. She alone was crafting a business plan, building the startup, and dealing with the specific logistics of the business model – such as finding the necessary parking spaces for shared vehicles. While Ms. Chase invested serious time and effort into these tasks over the next eighteen months, her co-founder did not even quit her day job. She contributed from the sidelines “at best” while Ms. Chase exerted far more effort into making the business successful.
The Right Corporate Lawyers For All California Startups
Do not become a cautionary tale for future entrepreneurs. Call (408) 441-7500 or contact us online to schedule a consultation with one of the experienced California corporate lawyers at Structure Law Group.