My friend Saroj Yadav shared a link from Seth Godin’s blog about a different way to split equity.

Seth describes a friend’s equity split situation where he was asked for advice. The friend was doing most of the work to get the company going, while his partner was contributing office space and some key technology. Instead of splitting 50/50 as most would do in this situation Seth recommended that his friend:

• Establish future milestones • Set a course of equity division when said milestones are reached • Appoint a trusted third party arbitrator to prevent litigation issues

This is excellent advice for anyone trying to determine equity split for partners. Chances are that if you are considering this you are trying to balance two different needs. You want to be fair, but at the same time you don’t want to be the person doing a disproportionate amount of work on an idea.

In my last startup we split equity equally according to initial contribution. As happens with many startups, demands from other projects, jobs, and family took over much of people’s times.  Those most driven by the initial vision end up doing most of the work, resenting the process, and eventually throwing in the towel.

When we threw in the towel it was the only suitable solution. IP was shared, so in order to do anything with the idea we either had to carry the dead weight of non-contributing partners, have messy arguments to have them exit, or get into messy litigation. Since the business was still in early stages it did not make sense to even go for litigation. Litigation would have meant lots of time and energy investment disallowing quick market testing and launch or at best make the product late to market.

So, do yourself a favor and split equity by future fulfillment of milestones. Who knows the disagreements on planning and priority just might make you realize that a certain team member won’t work. And then even if they don’t since shares are vested you don’t lose ownership to those not performing.

Alternatively you could vest shares for a time. This is what Umair Khan CEO of SecretBuilders recommends. This can be difficult to negotiate with partners who have had prior successes in the startup world or have other startup options besides your own. Others might offer them a better package. If you choose this route take extra steps to make sure you know as much as possible about who you are dealing with and what other options they have.

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