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[et_pb_section fb_built=”1″ _builder_version=”4.16″ global_colors_info=”{}” theme_builder_area=”post_content”][et_pb_row _builder_version=”4.18.0″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” hover_enabled=”0″ global_colors_info=”{}” theme_builder_area=”post_content” width=”100%” custom_padding=”0px||0px||false|false” sticky_enabled=”0″][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||” theme_builder_area=”post_content”][et_pb_text _builder_version=”4.18.0″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” hover_enabled=”0″ global_colors_info=”{}” theme_builder_area=”post_content” header_3_font_size=”25px” header_3_line_height=”1.7em” sticky_enabled=”0″ header_6_font_size=”20px” header_6_line_height=”1.7em”]<\/p>\n

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Guest Article By Kate Heptig, partner, Rivkin Radler LLP<\/em><\/h6>\n

\"\"<\/a>When starting a business, there are numerous decisions that must be made by the owners at the outset. One rises above all others, however, and becomes the proverbial elephant in the room \u2013 how to divide the founders\u2019 equity.<\/p>\n

The easiest answer, an even split among the founders, isn\u2019t necessarily the best one, even if it sidesteps the founders\u2019 emotions and egos. The primary shortcoming of this approach is that it fails to take into consideration the relative contributions being made by each individual.\u00a0 Ideally, the value of those contributions relative to the value of the enterprise would be the basis for determining how to apportion the equity. Unfortunately, in the context of a startup, valuation is far from an exact science.<\/p>\n

The Value Vacuum<\/strong><\/h3>\n

A startup, by its nature, has no history. There are no arm\u2019s-length transactions to use as a means of calculating the business\u2019 value, so assessing or even trying to predict that value is difficult.\u00a0 In addition, each founder likely brings something unique to the venture. Perhaps one of them had the original idea but has no business experience, while others have executive-level experience in the industry, or startup capital and an extensive business network. What impact will each of those contributions ultimately have on the success of the business? The challenge here is really twofold \u2013 the founders aren\u2019t sure what they are giving up to each other in value, nor what the venture will get back from each in return.<\/p>\n

Believe it or not, when advising startup founders, the two best pieces of advice I give to help guide them through the process come from Albert Einstein and Wayne Gretzky. You may wonder whether a physicist\/Nobel laureate and a hockey legend ever gave business advice, and the truth is, I\u2019m not sure either of them ever did. But, taken together, their quotes encompass the guiding principles that should be used by founders when deciding how to divide their initial equity.<\/p>\n

\u201cI skate to where the puck is going to be, not to where it has been<\/em>.\u201d\u00a0\u2013\u00a0Wayne Gretzky<\/strong><\/p>\n

Gretzky\u2019s notion of looking forward is an important piece of the puzzle for business founders. In the context of a startup, founders often get caught up arguing about how they got to where they are today \u2013 who had the original idea, who was willing to contribute capital, who has relevant business experience from a prior position. While each of these considerations is relevant and may be important, it\u2019s equally important for the group to consider what happens next, when the startup phase is complete and the doors are open for business. Although it\u2019s important to consider what background, experience, education and skills a founder is bringing to the enterprise, it\u2019s also important to look ahead and try to determine each founders\u2019 potential impact and level of commitment to the business. The founders, like Gretzky, literally need to try to stay ahead of the game.<\/p>\n

\u00a0<\/em><\/strong>\u201cNot everything that\u00a0can be counted counts, and not everything that counts can be counted.<\/em>\u201d\u00a0\u2013\u00a0<\/em>Albert Einstein<\/strong><\/p>\n

Each founder has gotten a seat at the table because he\/she is viewed by the others as a critical piece of the team who brings something valuable to the venture\u2019s success. The nature of those specific contributions is vast but can generally be grouped into categories, for example:<\/p>\n