“Measure what is measurable and make measurable what is not so.” – Galileo
For new partners, either starting a new venture or merging their businesses, few conversations are as difficult as discussing what the equity split will be. So, like any potentially messy conversation, it is often avoided. The default is to go with an even split or a split that ensures control to a specific founder.
When we see partners in serious trouble, with businesses that are in jeopardy because they can no longer work together, it is often because there is a sense of unfairness about contribution, compensation or control. Often this can be traced to decisions made about how ownership will be split, almost always a time of great uncertainty about how the business will develop and without full discussion of the implications of the decisions.
Making the Split Work
What could partners do differently to head off the resentments that come with this sense of unfairness?
- Accept that no equity split is going to be fair all the time. Even models that try to take a very dynamic approach to incorporate uncertainty will not add the stability needed for the venture to succeed without good communication among partners.
- Document not only the final equity split that is decided, but the process used to get to it. Include all factors that were included and how they were weighted.
- Decide on metrics to review the split at designated intervals as the business develops. It is impossible to anticipate some of the ways in which a business will need to pivot once it is launched and having a plan in place to review the shares at an agreed upon time helps keep the focus on doing what is best for the business.
All models, including the Owner’s Equity Matrix that we use with our clients, require assumptions about how contributions will affect the success of the business. There are only a few inputs that are easily quantifiable: capital contributions, for example. The value of ideas, skills, opportunity costs, industry experience, and networks are subjective. In the case of time commitments, there may need to be a discussion about productivity rather than hours spent working. Agreeing on the value of these factors requires honest and sometimes contentious conversations among people who then have to work closely together. Too often, partners reach agreement with significant unspoken reservations because they are eager to launch the business.
Equity ownership among partners has long term financial implications and affects how partners perceive their role in the business on an ongoing basis. As much as we would like it to be definitively encapsulated in a spreadsheet, it is important to understand that the dialogue that gets partners to their agreement is what makes ownership the foundation for a thriving business instead of a source of unresolved conflict.