EQUITY SPLIT TABLE BY CYNTHIA E. CHISOM

Equity Split Table and Guidelines

A coupe of months ago, I received an invitation to teach at GAF Academy on the topic ‘Team Management and Selection’. My audience was comprised of startup founders across 4 African countries. I had a great time teaching on how to get your team together, set up a board of advisors, how to manage your employees etc.

Just to give a bit of context for someone who is just hearing about the word equity. I’m going to address the following questions before I talk about the process of splitting equity.

1. What is equity?
2. How powerful is equity?
3. Why should I be bothered about equity split?
4. Who do you split equity with?
5. When is the best time to talk about equity split?
6. Case studies of bad equity split and the impact it has.

What is Equity?

According to BenjaminDada.com, Startup equity is the amount of ownership shareholders have in a startup. It is the percentage of the startup’s stock sold to stakeholders (such as investors, advisors, and employees). This gives them the right to share in the profit or loss of the startup.

How powerful is Equity?

It is so powerful, many startup founders have misused and misunderstood the power of equity such that it prevents them from earning as much as they should at the end of Trade sell, IPO, Merger etc. All the efforts that you put into your startup could go down the drain if you don't properly split equity. Hence, the reason why I'm taking my time to break down this concept. A good example can be found in one of the episodes of Startup Stories with Cynthia.

Why should I be bothered about Equity split?

Why shouldn’t you?

Who do you split Equity with?

Your Co-Founders, Investors, VCs, Employee, Partners, Shareholders, Angel Investors etc.? Basically, anyone who prefers this form of compensation for the value they’re bringing to the table.

When is the best time to talk about equity split?

As early as possible and as quickly as possible.

Now that these questions have been addressed, let's talk about the equity split table that I developed to help startup founders take a practical approach to splitting equity among themselves.?

Equity Split Table Guidelines:

Before I talk about the table, I’ve prepared the equity split guidelines, because you don’t go about splitting equity without preparing to have the equity conversation.

1. Make sure that everyone is clear about the purpose of the equity split meeting and you have had prior conversations that are friendly and smooth. This will help every co-founder get a clear head ahead of today’s meeting.?
2. The environment is super important. Make sure the environment is open, quiet and allows you to have a very intimate conversation, Give no room for distractions or disturbances. I will recommend that mobile devices be put away for the duration of this meeting.
3. Get everyone for this exercise to talk about issues if there are any, make sure everyone has a clear head before doing this exercise. I would recommend you go through the team selection procedure (Look out for an article on Team Selection) to help with the preparations for this exercise.?
4. Get all co-founders on the same table, preferably a round table because you need to be facing each other. The reason for this is to observe body language, observe emotions and gestures during this process because it will open you up to areas you need to address before the equity split itself.
5. Every co-founder should have a printed copy of The CEC Equity Split Table.?

Here is the pictorial representation of the Equity Split Table

EQUITY SPLIT TABLE BY CYNTHIA E. CHISOM

SECTION A

SECTION B

How to use the Equity Split Table

The entire table is divided into two parts. Section A is the table that should contain the description of the startup and the co-founding team.

Section B is where the calculations will be done.?

Before we talk about how the calculations will be done, let’s have a quick run-through of the different parts of Section B.

1. Strength/Value (List the strengths, skills or value that you bring to the table e.g network, financial capacity, product skills, marketing skills etc):?This is the most important part of the entire table. Each co-founder is expected to make a clear list of their strengths, skills or value or whatever capacity they’re contributing to the startup. Once the list has been created, each co-founder is expected to pass round their copy of the ES table fully listed with the strengths, skills, value or contributions they believe they are bringing to the table. By passing it around, you are ensuring that every co-founder agrees to this list. This is very important because whatever will happen after now will be highly dependent on this list. If there is no consensus regarding the list created by anyone, it is important that each person talks through the reasons they believe the list is not accepted. This conversation should go on until there is a consensus on the contributions that each co-founder will be making. Once a consensus has been reached, we can move on to the next part of the table.
2. CF 1 to CF n (Where n is the total number of Co-founders): Now that a list has been created and agreed upon by every co-founder, the next step is for each co-founder to put a percentage value of each skill/contribution. This means that as a co-founder you must ask yourself this question, ‘how much do I think my skill is bringing to the table in terms of a percentage value. What is the estimated value of my skill?’ This could be in a range of 0-100%. For example, I believe my marketing skill is of such great value and I would give it a 60% contribution value. Rate or grade each skill, value or strength that is written in this row over 100. Grade according to what you believe you contribute to the startup and allow other co-founders to do the same by passing it round `the table. In doing so, each co-founder can ask the question ‘what do I believe is the contribution value in percentage of the marketing skill of CF1’. (Note that CF1 is the original owner of the copy of the ES table as seen in Figure 1.2)
3. Column Average (Average of the total grade in each column): This reflects the average grade that has been provided by every co-founder for each skill that has been written. That singular number is a reflection of what every co-founder thinks that skill/contribution brings to the table.
4. Row Average (Average of the total grade in each row): This number is the number that the entire table is trying to derive for each co-founder. This is the average of the column average grades. This singular number is the reflection of what the co-founder in question is eligible for to based on the ES table. However, because as a start-up you need to give room for VC, Employee, Partners, Shareholders equity, you cannot use the entire 100% in your division. At this point, you are expected to define how much you want to set aside for equity split and how much you want to set aside for other stakeholders in your startup.

For example,?

The row average grades of three co-founders are:

CF1 = 55%

CF2 = 35%

CF3 = 10%

If the 3 co-founders decide to set aside 40% of the total company equity for key stakeholders like?VCs, Employees, Partners, Shareholders etc, it means that the startup will have 60% to be split amongst these 3 co-founders. This means that:

CF1 will have (55/100 * 60) = 33%

CF2 will have (35/100 * 60) = 21%

CF3 will have (10/100 * 60) = 6%

In conclusion, it means that CF1 will own 33%.?

Take note that this doesn’t show the details of how the equity will be split over time, it is only a reflection of the value/contribution of each co-founder.