In the world of business, there are times when sharing equity with a partner makes real sense, and is very much to your advantage. For instance, in a company startup situation, sharing equity might be the only real possibility to get the business launched and underway. With one or more investors behind the launch, you might well be obliged to share equity with each of them. When you find yourself in a situation like this, you should proceed very carefully, and pay attention to some of the important sharing equity tips described below. “Share Equity or Not Share Equity that is the question!”
Someone should be the majority equity holder
Ideally, that would be yourself, but someone in the company needs to be the majority holder, so as to avoid squabbles down the road. You might think that a 50-50 arrangement is the most fair and the most ideal, but there really needs to be someone who can pronounce the last word on any major issue, and that just won’t happen when equity is split right down the middle. Never be 50/50 when sharing equity!!
“When starting a company never be 50/50 when sharing equity….Never!” (Click to tweet)
Know who it is you’re giving equity to
As a bare minimum, make sure you know someone at least 90 days before giving equity in your company to them. Even if you are literally dazzled by someone who seems like a great worker, a great person, and who seems to share your vision for the business. Things can turn sour unbelievably quickly after you’ve given away a piece of your company, and at that point, it’s extremely difficult to backtrack out of it.
The same thing is true about hiring friends. You may have known someone a very long time before hiring them into your company, but all those years before the company don’t really matter – it’s what they’re like after joining your company. Make sure to evaluate how well they work within the framework of your company culture, and whether or not they share your thoughts about the future of the company. Giving away equity to retain some employee is definitely effective, but it should only be done when you’re absolutely sure you know the individual really well.
“It’s not about money or connections. It’s the willingness to outwork and out learn everyone when it comes to your business. And if it fails, you learn from what happened and do a better job next time.”-Mark Cuban
Consult with a mentor or advisor
If you really want to share equity with someone in your company, the one thing you should never do is arrange for that on Day 1, when they’re hired. That should not be a condition of employment, because it can come back to haunt you very soon. When you feel like you do have just the right person, it’s worth your while to consult a mentor, who can advise you on choosing the right sort of partner, and who can help you set up a vesting schedule which works for the business, and for your potential partner.
A mentor or advisor will be someone who has overseen or participated in situations like this before, and is aware of all the pitfalls and advantages to the situation, so they’re in a position to help you through it. Don’t be afraid to bring in an expert, because this is a major step in the evolution of your business, and it’s something you just have to get right. By following these sharing equity tips, you should be able to avoid disaster in your company, with regard to the sharing of equity.
Here to help
As always, let me know if I can be of any help with any parts of your business, I created a short FREE 2 min quiz to uncover your strength and weaknesses, take it here. Also if you are working on a new idea then you might want to look at the New Idea to Customer in 7 weeks course.