25 Mar 2014

Tricky business – allocating co-founder shares

By Paul Miller

How you allocate shares between co-founders when you start a new venture can be pretty gnarly if you don’t get it right. It’s also one of those things that can be tricky to talk about because it can seem both technical and emotional at the same time. If you’re applying to BGV, it also helps to decide this before you apply – we’ll more than likely ask you about it at interview.

There’s not really a formula for working out the split because every venture and every founder is different. Startups are still a new thing for most people and it’s quite hard to get your head around what is ‘normal’ or ‘fair’. An equal split can be the right thing – but you should come to that conclusion after an honest discussion rather than just because it’s the easiest option.

Each of the following is something that increases the value you bring to the venture and should probably be part of the discussion:

  • Are you putting money into the startup?
  • Was it your idea? Although bear in mind that making it happen will be much harder.
  • How much time have you spent so far?
  • What’s the technical value you bring?
  • What’s the design value you bring? Are you the one who really understands the problem you’re trying to solve.
  • Finally what’s the organisational value you bring?  Sometimes this is about leadership or it can be about the experience you have of running an organisation.

Ultimately which of the types of value you bring should be most highly valued is dependent on what the company is doing, but all are worth talking through.

A few other things to note:

  • Having the possibility of ‘deadlock’ in the way you split shares can turn out to be a problem – this is basically if you can add up the shares so that you could have a vote that ends in a draw. Splitting shares 51:49 is one way around this or you can appoint an independent Chairperson.
  • When it comes to vesting of shares, in the UK we do things slightly differently from the US because of tax law over here. The outcome is the same but the legal documents are different. What’s called vesting in the US is done as ‘reverse vesting’ in the UK.
  • In the UK, there’s a thing called Entrepreneurs Relief which is a tax break should your shares be sold. It has two qualifying criteria: You own at least 5% of the voting shares in the company and you work for the company when the shares are sold – worth bearing in mind.