There are different factors and circumstances such as experience, contributions, and roles that influence the distribution of the company’s share among the co-founders.
The discussion on how to divide the capital or share of a company can be based on emotions and it is often very unpleasant. This is why many co-founders tend to avoid this topic.
Since startups often do not generate enough income for salary costs, one of the most common ways to inspire and support co-founders is to share the company’s capital.
If you want to find out how to distribute a company share in the best way, this article is just for you.
Why is the company’s share divided among the co-founders?
The answer is quite simple. The main goal is to increase the loyalty and motivation among the co-founders.
The company’s share represents the degree of someone’s ownership of the company, and the acquired share can bring certain power to the decision-making process.
In this way, you will raise the enthusiasm and motivation of your co-founders. It will contribute to the productivity and growth of your business.
A company’s share has a certain value and emphasizes the importance of each member’s contribution.
Allocating company’s share – Methods
Dividing the company’s capital or share is not always as simple as it seems.
Despite the inevitable disagreements, the founder has to make the right decision for his company.
The majority of companies believe that ensuring fair distribution comes down to considering the opportunities, availability, and value generated by each of the co-founders.
There are some questions to ask about the co-founders:
- Are they fully committed (full-time job)?
- Are they in a technical or sales-based part of a company?
- Are they business growth drivers?
- Are they investing their money?
- Are they contributing their intellectual property to the company?
It is also very important to think carefully when it comes to the decision-making process because changing the responsibilities can also change the capital structure.
The most common methods used in share distribution among the co-owners are:
- Equal division of shares (50-50)
- Division of shares according to the main co-founder
- Unequal division of shares
Equal division of the company’s share (50-50)
The equal division is the most common method for allocating company shares.
That means, each co-founder receives the same share of the company, whether it is 50-50, 33-33-33, or 25-25-25-25, and so on.
On the one hand, the co-founders receive equal shares, but the personal contribution of each of them may differ. And this can lead to problems in the future.
Over time, one co-founder will contribute much more than another due to experience, skills, and different roles, so this method of fair distribution is not the best option for every company.
Division of shares according to the main co-founder
The most common type of unequal division of a company’s share is when one co-founder clearly stands out from the others.
The share in such a company is usually in the ratio of 80:20, where most part belongs to the main co-founder.
It is generally a good idea to have one main leader in the company unless there are two co-founders, and one gets significantly more capital than the other.
A problem can arise when the co-founder who got a smaller percentage feels underestimated and due to that, he is not motivated to work on improving the business.
Unequal division of the company’s share
The third method for allocating the company’s share is when one co-founder has slightly more capital than the others.
This method of dividing the company’s share can often be a win-win solution, where all parties benefit.
Unequal divisions, such as 51-49, 60-40, 40-30-30, mean that all co-founders are involved in leadership, risk, and responsibility.
All co-founders will receive a share of the company based on their work and contribution and therefore they will be motivated to work equally and contribute to the development of the company.
And finally, this method can be one of the best ways to fairly distribute the company’s share.
The founders face many difficulties when starting their own company, and one of them is to distribute the company’s share fairly.
It is very important that you distribute your share fairly to create a healthy and motivating environment for a successful business.
We hope that this text helps you choose the best method for allocating the share of your company.
And if you want to find out how Desk&More company can help you grow your business, contact us.