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Dividing up the equity between you and your team should be relatively straightforward. However, I’ve seen too many startup CEOs make the same mistakes over and over again. And some of these mistakes can really hurt your startup.
I don’t want that to happen to you. Based on my own experience dividing up equity in my company and helping too many startup CEOs fix the mistakes they’ve made, I’m going to share with you the ten most likely mistakes you’ll make dividing up your equity.
Let’s get started and let’s start with the most important one on my list, number one.
1. Your equity doesn’t vest over time
Imagine this scenario. You’ve divided the equity between you and your co-founder in a fifty fifty split. Then, your co-founder quits three months after you start.
So, unless you have vesting period for the stock, your co-founder that just left the company now owns fifty percent of your company. Of all the self-inflicted wounds you can give yourself, not having the equity you give, especially to you and your co-founders, vest over time, is the biggest.
The reason this is such a big issue is that over 50% of founder relationships fail. The answer is you should have your equity vest over time.
Ideally, you would have a four year vesting period with a one year cliff. The cliff means that one quarter of the equity will vest after one year.
So, if your co-founder leaves in that first year, you don’t have a bunch of dead equity sitting on your cap table. If you’ve made this mistake, I would try and correct it immediately by redoing the agreements with a vesting period. Next, let’s move to number two on our list…
2. You don’t refresh stock options.
Let’s say you add some great talent to your team. And you give them initial four year stock option grants that are very generous.
That’s great. However, what happens after the four years are complete? Obviously, the financial incentive to stick around goes down unless you grant more stock options to your employees.
