There is only 100 percent ownership in a company. It’s for founders who are totally committed to it, for investors who spend money and, later, for the most important trusted key employees.
It’s not for your cousins, your in-laws, the lawyer who did the initial paperwork or the vendor who did the website. It lasts forever. Ownership belongs with those who are fully dedicated to the company.
I like this summary by Asheesh Avani, who’s a brilliant strategist and a true expert on the ins and outs of small business and startup financing. Asheesh founded Circle Lending, which was purchased by the Richard Branson group and is now Virgin Lending. This is from one of his columns, called “A Fairer Share”:
In simple terms, founder stock is issued early in the life of a startup to the founder and co-founders. It determines how the ownership is divided up and it is typically based on each founder’s contribution to the key assets of the company. Unlike stock that is acquired as the business grows, founder stock is primarily granted for sweat equity–so it’s difficult to distribute fairly if there are multiple founders with different roles and levels of commitment.
I see so many startups that throw ownership around like it’s free admission to the opening day celebration. This is so often a no-win solution. If your new company never does anything, it’s just a waste, a disillusion. And if your company takes off, those early owners are there forever, causing problems, exercising minority ownership rights and scaring away professional investors.
One of the worst ways to save startup money is to give away ownership to service vendors.
Be careful. It’s not a casual favor. A co-owner is a long-term relationship. Make your equity count.
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This may be a little OT ~ however often I have seen founders wanting to divide the equity pie, way before they actually have a real company ~ or even done the due diligence on the viability of a product. There must be a right or good time to do this pie division, with additional pieces of pie (for the founders) as certain milestones have been met. I’d like to see your take on this? @CASUDI
Thanks Caroline (CASUDI), good comment, and good question. It’s hard to draw general rules in this area. I like to see the pie divided up before there’s money, because money tends to cloud vision and sense of fairness. But you make a good point, if the division is based on something still in the works but doesn’t happen, that can be unfair. On the other hand, basing things on milestones won’t always be fair either, because often milestones depend on multiple cooks working on the same broth. That’s what makes business business, right? Tim.