In his post, “Startup Founder Equity Splits,” Ryan Roberts touches on an age-old dilemma faced by many beginning entrepreneurs: “how much equity should I give to the other founders to provide me with money, contacts, or other benefits in getting my brainchild of the ground?” It’s a dilemma because many entrepreneurs want to control the whole ball of wax. However, few people are willing to make those kinds of contributions to a new company without getting something in return. That “something” is usually an equity share.
So what’s fair, and how do you have these discussions? The short and obvious answer is: it depends. As Roberts points out, it not only depends on the contributions someone has made in the past or is currently making, but also includes contributions they may make in the future. Contributions can include cash, intellectual property, industry expertise, and contacts.
For example, if your brother-in-law provides you with a $100,000 investment, that means that may seem like a great deal of money now. But you’ll want to take a long-term view as well. If that $100,000 is only 10% of the capital you will need to raise to finally launch your Great Next Thing, and he’s not inclined to give you one more red cent once you’ve blown through his hundred gram, he probably won’t be someone you want to get a 50% equity stake to.