Tips for splitting equity among founders

On Behalf of | Mar 15, 2021 | Business Law

When multiple people come together to start a Pennsylvania business, they are all entitled to a share of that company. However, there are several factors that will typically come into play when determining how much of a company a person should receive. Let’s take a closer look at how to ensure that each person’s ownership stake reflects their contributions to the business.

The CEO should be the majority owner

In most cases, the CEO is the person who came up with the idea for the business. Alternatively, this person might have the most experience running a company, which means that he or she is most qualified to lead a startup to long-term success. Therefore, whoever holds this title is often granted at least a 50% stake in the organization. Of course, that stake could be diluted if additional partners join the firm.

Who is doing the majority of the work?

A person’s title isn’t the only important factor to consider when determining how to allocate a company’s equity. Ideally, those who take the lead when it comes to finding clients, negotiating deals with suppliers or other important tasks will be compensated for their efforts in the form of an ownership interest.

Can a founder buy additional equity?

In some cases, it may be a good idea to allow a founder to provide working capital in exchange for additional equity in the business. However, it’s important to note that doing so may limit the company’s short-term valuation. A business law attorney may be able to help you understand the implications of a partner purchasing equity in your firm.

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