We often hear questions from entrepreneurs who’ve found a business partner and are working on starting a business, but aren’t sure who should get what percentages of the equity in their new business. Obviously there isn’t one easy way to allocate the ownership of your new business, and there are a lot of factors to consider when assigning equity. However, this post will take a general look at the process of assigning the initial equity of a company.

1. Determine how much you and your business partners are worth

This is often one of the biggest sticking points in any partnership negotiation. Take a look at what role you and your partner(s) will be filling in the new company and try to calculate a value for each partner.

This will depend on a variety of factors, but some good questions to ask yourself are: How much time will each of you be working? Will one of you be traveling all of the time and working non-stop during their travels? How much did each of you get paid in your previous jobs? How much do comparable executives get paid in your functional area for small to mid-sized companies?

Once you’ve assessed this, look at your business plan and try to figure out how long you and your partner plan to go without salaries. Then, multiply the annual salary that each of you is worth by the number of years that you plan to be without salary. This effort that you’re putting into the company is called sweat equity and will be figured into how the equity pie gets divided.
 

2. Look at how much capital (or assets) each business partner is contributing

This can often make the biggest difference in who owns how much of the company. Look at the cash and asset contributions from each of the partners and add them all up. Make sure to include everything that gets contributed: cash, furniture and fixtures, computers, equipment, machinery, office supplies, etc. Although some might argue that the term is technically incorrect, most people refer to everything, including non-cash assets, which the partners give to the company as contributed capital.
 

3. Add everything up and calculate the ownership percentages

The last step is to add up all of the sweat equity and contributed capital to the company to get a total dollar value. Then, add up each of the partners’ contributions and divide it by the total you’ve just calculated. This should give you a percentage of ownership for each partner.
 

There can be a lot of variations here and this post isn’t meant to be all-inclusive. The main reason that I’ve written this is to demonstrate that a partnership doesn’t have to automatically be 50/50. It is perfectly reasonable to have an equal partnership, but you should definitely sit back and take a look at everything that each partner brings to the table and how much equity they are entitled to in exchange for their contribution. Also, there may be situations in which you want to give one partner more equity than another. Perhaps one partner is exposed to more risk and accordingly you feel that they are entitled to more reward. In any event, the key to this decision is to ensure that all partners feel like they are getting a fair deal and that they don’t lose interest in working for the company after the equity allocation negotiations.

Finally, before you do any deal you should always talk with an experienced attorney and accountant. People often tell me that they just can’t afford to pay an attorney or accountant for an hour of their time and my response is always the same. If you want to grow your company to be the next Microsoft or Google, wouldn’t it seem pretty foolish to potentially risk millions of dollars in the future over a few hundred dollars today?

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