When equal is not equitable amongst founders

Hello world.

In this maiden post, I would like to discuss a common yet not much discussed  issue regarding equity split at the beginning of an enterprise or venture.

This is a very touchy subject, especially to us Asian. This touches on trust and the perceived ability of the partners and founders to be equitable, to be fair and honest to each other. Many would simply decide on an arbitrary figure, say 50:50, especially amongst friends, later to fail miserably and friends become foes. Not all, but many.

Sometimes we are so caught up with the idea, the excitement of projected profits the opportunities and possibilities. It made us very optimistic, abundantly confident that the partnership is rock solid and equal is equity. 

This is indeed a very difficult subject to discuss between partners or prospective partners. Especially if the partners are friends.  Many of us would feel extremely awkward and uncomfortable when it comes to discussing money and wealth and splitting it up, especially when we have not even embarked on our journey. While we do not want to be seen as being greedy, we equally do not wish to be taken advantage of; but the taboo of discussing money upfront is such a taboo. So, many ended agreeing on whatever was first suggested, without giving it much thought on the implications later. To disagree and negotiate feel so unnatural and untrustworthy.

But if partners cannot sit down and thrash over this hard issue early on in the venture, what hope does the partnership looks like when actual money starts coming in and there are actual values/ringgit/dollars assigned to those percentages. It could be $50 or $50 million. The equal split suddenly does not very equitable as each partners feels that have put in more value into the venture.

Well, equal is not equity. Different partners brings different values to the table, before and after the incorporation. Resorting to cash injection as the sole determinant is erroneous as it excludes intellectual property and a host of other non-tangible assets.

Having said that, there is not fixed formula on equity split. It is an art, not science. However, there are some methods applied by many, including Vesting, Stock Options and others.You can get some answers here too.

Sometimes it is also worth getting a professional to step in and assist you in coming to a conclusion. It is much easier to keep a friendship when you have a third party to blame (needless to say, the third party gets paid well for this).