If you are contemplating starting a new venture with someone else one of the first questions to discuss is how to divide the equity and profits. Everyone thinks this topic is easy-peasy. Your business will be HUGELY successful, there will be tons of money to spare and a 50/50 split of $1 Billion dollars is still a heck of a lot of money. So you and your partners agree to split everything evenly before addressing what the everyday, real work is going to look like.
In actuality, the dream is usually not as you initially anticipated. This is why talking about a partnership where equity is divided differently is important. Without a doubt, this is a hard conversation to have with people you want to work with. It is imperative, however. Here are 3 reasons why partnerships are almost always not equal.
1) You and your co-partners will not work the same hours. Most times you and your partners are at different stages in life. One of you may be starting a family or seeking a promotion at a full-time job or juggling two part-time jobs. Someone may be unemployed at the time and able to devote 100 hours a week to the new venture. Often, time equals money, and the partner putting in more hours may want to think about whether she is comfortable splitting the profits with a partner who can’t devote full-time hours to the new venture.
2) You and your co-partners have different skills. It almost never makes sense to partner with someone with the same skill set as yours. After all, if BOTH of you know a lot about web design and no one knows how to manage the books or recruit clients, then the business won’t go very far. These varying skills often have different values to a start-up company. You and your partner should discuss the value your skills bring to the long-term goals of the company and how that value relates to the success and profits of the company.
3) You and your co-partners are contributing different amounts of capital. Start-ups cost money. There are the filing fees, the cost of development and networking, not to mention product development and market research. All of these cost cold, hard, cash. People have different comfort levels with regards to how much they are going to pay forward without a guaranteed return. If one partner is willing to commit more funds (or find people who are willing to take this risk) this might lead to that partner believing he is entitled to more profit. This is a conversation you want to have BEFORE committing yourself to an even split.
These points suggest that you should have a long discussion with potential partners before agreeing to any split in writing. Instead of assuming an equal split, each partner should sit down individually and address where she feels her time, skills and money lie in regards to the start-up. Then the partners can have an open conversation about where things should start. A good partnership agreement can set out timelines for changing the profit structure over time or if circumstances change. The key is to set something down in writing that works for the current situation but is flexible enough to change when needed.