How should equity be split between founders, investors & others when the company is bootstrapped?

Being an entrepreneur, What would be your true aspiration? To make profits, To capture the market, To achieve success in your product line, To do this and to do that. Isn’t it ? Ok..!!! Now being the consultant or investor or employee of an enterprise, What would be your aspiration ? It would definitely be to share fair values or equity or the rights in the enterprise. Why not ? You have channelized effort and hard work into the business, so you have the rights to seek the provisions.

The responsibility involved in splitting equity is quite tricky and tedious because you need to be fair and impartial. The contribution should be made according to the set of protocol, so that the parties, as well as the business get the requisite benefits in an appropriate term.

How should equity be split between founders, investors & others when the company is bootstrapped

Generally, the entrepreneur who works behind splitting equity keeps in mind the following elements associated with “Equity” and “Split”. As this allows them to come out with a better and fair decision.

  • They assume that the equity split should be done according to the roles played by each individual associated with the business. This seems to be fair because better you contribute towards the concern, the better you yield.
  • They consider that equity share of the concerned person should be equal to his contribution in the business. Eg: 25% contribution states 25% of share in the equity. This model also considers the importance of the role.
  • Calculation of equity to be done appropriately using proper tools and applicable techniques.
  • They prefer to do even split up because it helps maintain stability in the enterprise.
  • They prefer sitting down and discussing the whole issue in calm rather than jumping into an easy way to split up equity.
  • Analyzing every bit of the pie before splitting is what they consider the best option. Seeking personal opinions from every individual and reasoning every single answer is what they prefer before making a decision.

Every enterprise uses a different set of equity split model according to the nature and characteristics of their enterprise. Some entrepreneurs prefer fixed- equity split model, whereas some rely on dynamic- equity split model. Apart from the variety of tailored ways, there are several instant online equity split calculator that helps an entrepreneur to a greater extent. The equity split document is drafted after thorough analyzes and survey. Because slicing a big pie of equity among different people as per their role is something that requires great care and diligence.

Do You Know The Variety Of Roles Played In The Enterprise ?
Well..!! Knowing different roles and their requisite importance would help you divide the equity fairly among the people associated with your enterprise:

  1. A person involved with the finances.
  2. CEO
  3. The key person who networks and communicates.
  4. A person involved in innovation.
  5. Managers.
  6. Developers.
  7. Leader.
  8. Experts.
  9. Consultants.
  10. Professional Advisor.
  11. Investors

Each role performs their work according to the allocation of equity in their court.

For a bootstrapped company the best option would be to carve on the dynamic equity split model because it leaves some scope to deal with future in better terms rather than a fixed equity model program. The dynamic model allows the startup to add value to their contribution which involves key elements like relationships, ideas, money and business itself. Thereby, in this model the decision with respect to equity split becomes easy because it is decided based upon the contribution made by individuals as per their roles and responsibility.

The assumptions with respect to the split- up should be clarified in precise terms during the incorporation itself. Because it is going to be either of the below- mentioned ways:

  1. No equal contribution: This way projects that the division is going to be made as per the contribution or role or effort of every single individual.
  2. Equal founders: This states that the split would be done equally for all the founders involved expect the labors and the other parties.
  3. Ownership basis: This states that the role played by an individual at the pre- corporation stage would be the key element behind the equity split.
  4. Fair share: This means that the share would be fair and impartial to all the people involved in the enterprise growth.
  5. Any Other: It depicts that the process id going to happen according to the nature, type and the circumstance of the business.

Investors Can Rescue:
A bootstrap company can rely on the investor for good help. Because they have good knowledge and idea on dealing with equity and split ups. They turn out to be an angel who helps you deal perfectly with the percentages, vesting schedule and financial structure. Investors give better advice to deal with the equity according to the nature of your company or enterprise and the persons involved.

STAY SMART:
Being a bootstrapped company you cannot step big by giving away your equity’s blindly. You have to give appropriate preference to the person involved in your business including the investor. So, it would be a better option if you hold back some in your hand and let go off some because you need to expand in the future. Decide the percentage wisely after acquiring maximum details and information. Consider the role played and contribution made as an important attribute. During this complication make sure that you don not clash with the participants in your business as it will lead to chaos and losses.

Altogether, Document the scenario pretty well, to come- up with an optimum equity split that ends up making every individual pockets happy.

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