The Worst Shareholder Structure
Dividing shares equally among founders may seem like the most straightforward option when forming a new business, but there are numerous risks to consider. By working with an experienced attorney, new businesses can avoid such issues. A lawyer can offer advice and assist in building a business that is most suited to your particular needs, whether this includes choosing your business entity type, your management structure, or your equity compensation.
Why Equal Share Split Can Be The Worst Choice
For the founders of a new company, an equal share split may not be the best option for a variety of reasons. Founders will usually have different expectations about the contributions they will make to the company. While some seek to handle marketing and commercial plans, others want to create intellectual property. Others prefer to invest in a passive way, while some want to have an active role in the business. In order to understand each other’s working styles, expectations for each founder’s contributions, and future goals for the business, founders need to put in the work of long-term communication and compromise. In a business partnership, getting to know one another takes time, but a strong mutual understanding will prevent issues down the line.
Additionally, the Harvard Business Review states that businesses with an equal founders’ split have more trouble obtaining outside funding, particularly venture capital. The majority of companies rely on outside investment. Before your business operations even get off the ground, having an equal founders’ share can eliminate your financing alternatives.
There are well-known organizations whose founders later regretted their initial share split. Take Facebook founders Mark Zuckerberg and Eduardo Saverin, who dealt with a rift that cost them millions to sort out in court. In their initial split, Zuckerberg held 65 percent compared to Saverin’s 30 percent, but there was contention when Zuckerberg rebuilt the business and reduced Saverin’s shares to less than 10 percent.
Car-sharing service Zipcar was established over a handshake, solidifying a 50/50 divide. Although co-founder Robin Chase initially believed that this was a good strategy to prevent ownership disputes, major issues eventually arose. She worked alone on creating the startup, developing the business plan, and handling the particular aspects of the business model, such as locating the required parking places for shared vehicles. Over the following 18 months, Chase gave these tasks her undivided attention, while her co-founder did not even give up her day job. She participated from the sidelines while Ms. Chase put much more work into running the company successfully.
These real-life examples show why every company should agree on an equity split that suits their very specific needs.
