6 Steps to Equity Splitting

How we made the ‘founders conversation’ a bit easier

In my first major startup experience, Plexx, our ‘founders agreement’ conversation was a disaster. Here are a few of the mistakes we made: We worked as a team for about 8 months without clearly defining roles. A team of two MBAs (mistake #1), we danced around the ‘CEO’ and equity split conversations. We kept delaying until we received our first check from an investor and had to file as a company. That day we locked ourselves in a room to define an agreement. We were unsuccessful. We spent two days yelling at each other, performing spreadsheet exercises, crying, conference calling advisors, and still made little progress.

A week later, we made some hard concessions and found common ground. After all that, when I left the startup a few months later, my partner did not adhere to the terms we had agreed upon.

Needless to say, after that experience, I was scarred, but I learned some valuable lessons.

A week ago, we concluded our founders agreement conversations for, ALEX, the new startup our team is founding. It was surprisingly smooth. After having such a dramatic contrast, I wanted to share the principles that I felt made the process a success.

1. Be upfront — When our team first came together I made it clear that I was working on this concept and was looking for teammates, but for the next few months we were ‘founder dating’. All team members at this point were volunteers, in it to learn, and to see how we ‘gelled’ as a team. We would reevaluate in a few months after the major competitions. After a few months, I asked the most active of the crew that I thought ‘fit’ in terms of skills needed, to join the team. As we continued forward I openly discussed the roles we thought were best for each of them.
2. Move forward together — I realized I knew more about the founders agreement process than my colleagues including the significance of dilution, vesting, intellectual property, and other terms. Instead of rushing in, we covered important topics as apart of working sessions. In one weekly meeting we talked about the human, social, and financial capital we each bring to the table (from Founder’s Dilemmas). Another session we did a mock equity split simulation with a fictitious company and two founders. Following we talked about how dilution and vesting work. We did this a few weeks before we actually had our own conversation to allow time to have comfort with the process.
3. Over communicate — We make sure we share meetings, cc’ more often than not on communications, and take times to provide quick feedback. When there was tension about certain subjects, we addressed it quickly and directly. Example one co-founder shared she was expecting a baby. We had an open conversation together to first celebrate and second understand what we needed to do to make sure we are successful — and we make sure we all were clear on what to expect. We talked about how much time and money we could contribute, the trade offs we each were making, and why this was important to each of us. And when in doubt, state your intent again, even if you have already said it. Once is never enough.
4. Seek to understand each other — After our first conversation about types of ‘capital’ we contribute one of the co-founders seemed put-off. We quickly had a conversation and they expressed unfamiliarity with the ‘business speak’. We reviewed the terms and purpose again, and next time we had a conversation, we were all on the same page. The process of stating and understanding how we felt throughout the process was key. Even if something logically made sense, we took time to discuss where what we thought and how we felt two deviated.
5. Use a process to separate facts and feelings — For the equity split process we used an excel tool to guide us. We first selected and agreed on categories. Following, we each spent time independently filling out a ‘weight’ for each category and a ‘weight’ for each person in each category. The next step, as a team was to go row by row and discuss what each of our weightings were and why for the category and each person. We shared what we think and how we feel. Example, I had been researching this area for several years, and felt protective over the business — but wanted to build a strong team and expressed that intent. At the end we each had our own grid and totaled a weighted average that represented our ‘points’ which were used to determine an approximate equity split.

Sample Chart

6. Build trust — After we each shared our equity splits, we talked about how we felt about the results and if we each felt it was fair. This was personally important to me as during my first startup, I felt I agreed to something that I did not believe was fair, which eroded trust between myself and my co-founder. In the end the founders agreement exercise is meant to establish clear expectations and build trust within the team. In reality you want to trust your team members to do what is right and stick to their word with or without an agreement.

When it was all said and done, I could hardly believe how smoothly it went. Investing in being ‘one team’ truly made a world of a difference and I look forward to what the future holds for our startup, ALEX.