31 Jul How to dynamically split up equity in your startup?
As founders, one of the most difficult decisions we face that the early-stage of a startup is how to split equity amongst the founding team. Often the most simple route is a straight split. But this can lead to fundamental problems later on in the life of a startup.
The common question of “what is an idea worth” often comes up. In reality, a good idea and R50 will buy you a cup of coffee. The same problem is true of valuing the contribution of early stage investors and advisors.
One of my last startups was done on an 50/50 split, but I ended up doing 80% of the work. Then my co-founder took a full-time position back in the workforce, so I really had no alternative but to close the down the opportunity rather than buy-out his share. A good shareholder agreement can help with that problem, but your actual calculations are still often based on guesswork or notional contributions.
Dynamic Equity Splitting solves that problem by allocating the percentages of ownership after the fact, based on the actual contributions of founders, as well as investors, advisors, consultants, and even early stage hires, relative to their experience and actual contribution of labour or resources.
Dynamic Equity Splitting is a concept pioneered by another successful entrepreneur, Mike Moyer, who has had a number of succesful startup based out of the US. He also happens to lecture at the prestigious University of Chicago Booth School of Business, as well as mentoring and supporting startups (using Dynamic Equity Splitting) so his experience is well based in both the theory and the practical.
It’s gaining interest around the world from founders who want to address the challenges of splitting equity. Even the startup media has recently become interested.
DES is now the cornerstone of all our startups, including of a new type of accelerator program that we’ll be launching shortly, for young people wanting to enter the startup space, a group often overlooked in the crowd full of 20-something graduates. DES is fairer, eliminates ambiguity, recognises value, and rewards people based on their actual contribution, relative to the total contributions made by all, using pre-agreed formulas.
This also gives investors & advisors some certainty and aligns the equity of founder shares relative to the value of their own financial & advisory contributions, thereby de-risking an important part of the startup dilemma. This promotes open-ness & communication around equity, and can remove some of the ambiguity or disagreement around ownership splitting, freeing up founders & advisors to focus on critical areas area likes marketing , business development, and product/market fit.
All 11 of our startups will be using this model, and we encourage others to consider it as a method of splitting equity between founders.