A potential stumbling block for a group of entrepreneurs ready to launch a new corporation is how to allocate ownership among the founders. There’s no reason to delay the start of a new venture over this issue. The company founders only need to apply some objective factors to determine an equitable arrangement as shareholders.
The first detail to remember is that the person with the business idea is not deserving of most of the company’s equity. The idea is a very small part of a corporation’s value. Success for a start-up operation is about execution. Accomplishing that involves individuals with the following factors to contribute.
1. The number one consideration is a founder’s experience operating a start-up business. Running a start-up requires a different skill set than functioning as a Fortune 500 executive. The founder with credible experience as an entrepreneur provides more value to a new corporation than founders lacking this attribute.
2. Bringing the initial capital to a new venture trumps almost everything else in importance. A founder who steps up with real money in the first stage of operation is making an essential contribution.
3. Intellectual property contributions are almost as important as cash infusions. This is more than just the business idea. Intellectual property is something of tangible value such as a patent, trademark, copyright, or trade secret. These can be one of the major components of the new corporation’s launch.
4. Market connections are the next factor to weigh. A founder with experience in the industry knows vendors and potential customers. After the new company has a product, some distribution channel must be forged. A founder with some inroads to achieving this is quite worthy of consideration for extra company equity.
5. The amount of time committed by co-founders is obviously a factor in spreading equity. Not every new corporation involves equal contributions of time by all the founders.
The division of equity might be justifiably equal if five co-founders each brought only one of these factors to a new venture. But if one founder brings all the money and intellectual property plus contributes equally in the other areas, that person should clearly have more equity in the new corporation.
Entrepreneurs should also remember that the allocation of shares is only at the formation stage. Whenever outside investors are obtained in the future, the ownership of each founder is diluted equally.