Startups are the future of the business world. And this is not surprising when you look at the success of some startups like Amazon and Google. Naturally, startups attract quite a lot of talent due to their potential. But there is also a problem. When you have so many talented and competent people under one roof, you have to figure out how to divide the capital.
Keep in mind that large companies and organizations offer their employees big salaries to entice them. But startups don’t have that option. They lure their employees by sharing company property. But when too many people are involved, capital sharing can become quite a challenge.
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How to share capital and its importance
Before we talk about the division of capital, you must clearly understand that terms entail. Equity is essentially a non-monetary consideration in which individuals in a company receive partial ownership. Usually the capital is divided between the early founders, employees who joined the startup in the early days, and, of course, financial supporters.
Let’s not forget that startup founders want top talent to be part of their team. Consequently, they transfer a small share of the company’s ownership to these employees. In fact, this is compensation for the risk of working in a startup that has not yet been created. A good example of this is Instagram, where 13 employees received a 10% stake in the company.
What to consider when dividing a share?
You have decided to split the capital to attract talent. But what would be an honest way to do this? It can actually be quite overwhelming. However, if you want to share capital fairly, there are quite a few factors to consider.
Startup Conceptualization
Naturally, the person who developed the startup idea and played a key role in its birth deserves the largest share in the capital. However, sometimes it is not so easy. Many startups have more than one founder. So how to divide the capital in this situation?
A fair way to share the capital in such cases is to value everyone’s contribution to the startup. What is the contribution of each founder to early development? Take Instagram as an example. It has two founders, but the one who is engaged in technological innovation has a large share.
Launch phase
The size of the share in the capital that a person should receive depends on at what stage he joined the company. Naturally, the co-founders and employees who have been a part of this since the beginning deserve a bigger bite. After all, they should be adequately compensated for their risks and efforts.
When it works like a payroll replacement
If you share capital to give some employees a share of the company as a replacement for wages, you must determine the share based on the number of employees involved.
Remember that you are using this share as bait for the best talent. So you need to make sure they feel like they are getting adequate compensation.
financial investments
When distributing capital, it is necessary to take into account the contribution of each team member. Usually, the one who has invested more in the project receives more shares. However, you must also consider past and future contributions.
For example, how much time did each spend pitching a business idea to potential investors? What contribution did each team member make to the development of the startup? Which team member is more likely to be critical to a future startup due to their professional knowledge and experience?
The answers to these questions make it easier to determine how to divide the capital and how many shares to give to each person.
Time to share shares: how to act
Many people believe that justice should be divided equally among all participants. It rarely works, and someone always gets offended. After all, different people contribute to a startup to varying degrees. And it seems unfair that someone who has come a long and grueling journey gets the same share as someone who just joined the company. Here’s what you should do.
Decide on a capital split method
Instead of one person dictating the rules, it is desirable that everyone has a say in this matter. Once you have chosen a capital split method, you must clearly explain it to all parties involved. Make sure everyone understands and agrees with the process. This ensures that there will be no disagreements or resentment later.
Fairness is the key
Remember that your startup is currently in a vulnerable stage. It won’t help if your team resents the way things are done. Thus, you must ensure that you are fair in determining the split percentage.
Think about protecting yourself
Yes, you must give everyone your fair share of the capital. But remember to protect yourself in generosity. If you co-founded this startup, you should consider the possibility that you may have to part ways in the future. Plan for the future and make sure you protect your interests.
Capital Sharing: Realize the Importance
Many startups have had to shut down because their co-founders couldn’t reach an agreement on their share of the equity. Remember, a failed startup can be a huge blow. Don’t let things get to this point and make sure you are prepared for the worst. Find out how to split shares so that no one is disappointed.
