Equity distribution in early-stage startups is a slightly odd subject. Obviously at this point the startup is worth nothing – or less-than-nothing, if expenses are being recorded as debts on the future company – and who wants to argue about percentage points of nothing? Sometimes the whole subject is just ignored.
On the other hand, whatever the addressable market size of the idea at hand, the spectre of founders squabbling over enormous wealth is lurking somewhere in the subconscious of everyone involved, so it is equally possible to go the other way, and invoke complex calculation methods of one kind or another, however irrationally over-fussy.
While complex approaches are arguably better than failing to address the issue at all, a simpler method is more typically adopted: if there are two founders at the beginning, they are usually assumed to have 50% each, if three, 33 1/3%, etc – as in this Seedcamp agreement template.
If they add additional co-founders, there is a re-distribution by agreement, such that the original co-founders see their percentage ownership reduced, to ‘make room’ for the new partner. The process is repeated each time a new equity-holder is added (ignoring such things as special share types – usually considered as over-complicated at early stages).
I consider that there are several problems with this:
Continue reading “Startup Equity Distribution – an incremental approach”
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