Why all of the founders should earn back their founder equity over time.
You are one of a group of neighborhood buddies who all share a passion for the beer business. Or you and a couple of college friends meet every Friday after work to talk about launching the company you all have talked about since your dorm room days. You are now ready to launch and the first order of business is to allocate the equity among the three of you.
Is this a 15 minute discussion where you take the easy way out and go 1/3–1/3–1/3? Studies show that this will eventually create dangerous cracks in the startup team that are exasperated in the first year of your venture.
Hopefully you took the more prudent step and spent a few hours discussing which roles each will play, how much sweat equity each was positioned to provide and any cash contributions to get the idea off the ground. It’s a tough but necessary discussion. If you can’t have it now it is a red flag to how you will make subsequent critical decisions later on. Suck it up, put on your big-boy pants and talk about the hard stuff now. Leigh Buchanan outlined two key themes; Consider the Contributions and Time It Right in her article last fall here on Inc.com.
Now that you have that out of the way you can breathe a little easier. All you have to do is write this up and everyone sign the equity docs. You now have an agreement that works for all of about 24 hours and erodes quickly after that. Why?
You see, one of you will not execute their fair share for any number of reasons (some of them very reasonable). You and your spouse decide to have a kid and the entire startup plan gets put in jeopardy. My favorite is that big offer that comes from a company that you have always admired from afar and you “just can’t pass up this opportunity”. Like I said, there are a variety of reasons why one of the founding partners fades away from the business.
Read the rest of the article here where I provide a few tips of how to deal with this issue. You can also see the rest of my INC articles here on my INC author page.