Second most common reason for
startup ventures floundering is acrimony between founders. How can this be
of the most difficult aspects of being a startup founder is deciding how to
decide equity shareholders. You can only give away so
much before it no longer feels like yours.When starting a business, founders
tend to divide ownership equally among the partners. Many start-ups are
conceived with founders knowing each other.
friends join together, they are equal and hence they must get equal share in
the venture they are starting with. If the partners are not contributing
equally, is it desirable?
What is a shareholder in Business?
Shareholders are part-owners of a
business, whereas directors are in charge of the company's business operations.
Shareholders' duties are generally limited to any unpaid amounts on shares they
own, whereas directors are subject to a variety of obligations under federal,
state, and territory law.
An equity shareholder can own as few as
one share of a company. Shareholders are subject to capital gains (or losses)
and/or dividend payments as residual claimants on a company's profits.
How many shares should a founder
a startup is first formed, it is customarily authorised to issue 10,000,000
shares of common stock. The initial distribution of this equity will be divided
into three categories: The founders will be given $8,000,000. These shares will
be distributed in proportion to each founder's ownership percentage.
Is a founder a shareholder?
majority shareholder is a single shareholder who owns and controls more than
half of a company's outstanding shares. Majority shareholders are frequently
company founders in many cases, and in older companies, majority shareholders
are frequently descendants of company founders.
Difference between member and
Member: A person whose name is entered in a
company's register of members becomes a member of that company. The register
contains every detail about the member, such as name, address, occupation, date
of joining, and so on. It also includes anyone who owns a company's stock and
whose name is listed as a beneficial owner in depository records.
Shareholder: A 'Shareholder' is a person
who owns a share of a public or private company. A share subscriber is not
considered a shareholder until the shares are actually allotted to him.The
shareholders own the company to the extent of the share capital that they hold.
understand difference between member and
shareholder, let me share an
example, Ankit, Joseph and Dimple were in the same college. Ankit is one year
senior to the other two and is also the harbinger of starting this venture. He
knew Joseph, for his technology passion and Dimple for her outgoing public
speaking and reach-out skills.
quite convinced with his idea, shares it and asks them to join him. Joseph has
issues with non-supporting family to his start-up idea and Dimple can’t
relocate to the city the venture is starting in.
Still, Ankit is left with these two, as he has
approached many others in the past three months, with a promise of they joining
him but never did. Ankit settled for this option.
agree that Joseph and Dimple will be in full time jobs and support the venture
by contributing Rs 20,000 each month, besides shouldering some responsibilities
relating to their area of passion, for an equal share in the venture. Dimple
plans to join Ankit, full time in a year’s time.
understanding is innovative as is expected from a startup founder. But there
are two problems in this arrangement. One, Ankit is left alone to manage the
affairs of the enterprise with very selective and specific role shouldered by
others. That makes his team a no-go before any investor.
Second, the venture needed about Rs 20 Lakhs
over two years, 50% of which Ankit will need to invest from his side. Ankit is
full time. Joseph and Dimple are not. Major risk is borne by Ankit.
analyze further, simplistically, let’s take only two key parameters into
consideration – role and investment.
are roles of CEO, CFO, CTO, CMO and CHR to say the least in any venture. In the
above case example, CEO and CFO roles are with Ankit, CTO with Joseph and
CMO/CHR with Dimple.
not in full time engagement, would Joseph and Dimple be able to perform their
CTO and CMO roles completely or any spill over will need to be managed by Ankit
himself or through outsourced help? Joseph being at Mckinsey argues that his
technical prowess and work environment will help him come up with better
technical solutions faster, to make up for his less time involvement.
The investment share of three is in 50%,
25%, 25% composition. It is also unequal.
such a scenario, should the share of three in the venture be equal? I feel no.
is likely to be fallout from such an arrangement? Is it not an innovative
method of win-win-win situation created by the founders of this venture?
venture soon will see the frustration of not only Ankit, but also of other two.
Most likely decisions will be taken by Ankit, sometimes not in consultation, as
generally is demanded of the situation in any small organization.
Also, Ankit’s un-intentional encroachment on
CTO or CMO roles, as necessitated, may not find approval from Joseph and
Dimple. Soon, based on human psychology, every chance is for Ankit to feel
cheated and frustrated for doing ALL the work, while others are not
contributing enough, but is equal partner.
solution thus is to make unequal partnership based on these two factors – role
and investment. Give weightage of 70% to the role and 30% to the investment.
This is also the way to indicate defined leadership with adequate authority to
make final decision and sufficient compensation to remain motivated.
the scheme of things, only distribute 90%, keeping about 10% of the share
reserved for ESOPs that will come handy to attract key talent later.
Considering each of Joseph and Dimple are able to contribute about 75% to their
role in this fashion and kind of investment mentioned, the share of partnership
should be 38%, 26%, 26% amongst Ankit, Joseph and Dimple respectively.
Dimple joins full time after a year, this percentage should change to 35%, 26%
and 29%. Whatever is the share, keep a period of vesting from 3 to 4 years at
equally important to note what happens in the real life. Circumstances change
and partners do quit. In the identified situation, some partners due to their
peripheral involvement have low risk to quit the venture and thus have more
pertinent to design the smooth exit safeguarding the interest of all involved.
As revenue results and valuations may not be available (quit decision less
likely if they are available and sound) by the time quit decision comes from
any of the three, it is prudent to provision for about double the market rate
returns (of 10%) on the invested amount in the year 1 and triple the returns in
the year 2.
given solution is indicative and variations in situation may impact a change in
the share, keeping approach the same.
support the arguments of un-equal share in partnerships even if all the
co-founders are on-board full time. Differentiate by small percentage, based on
the amount of investment, but the governance structure must be clearly defined
in case of disagreements.
All significant decisions must be made on
consensus, transparency kept fully else partnership will break sooner than one
thinks. However, clearly defined conflict resolution goes a long way in smooth
running of the enterprise and bringing in order.
About Author - Ashish mentors founders of start-ups on strategy