The Ultimate Guide to Dividing Equity in a Small Business

Starting a small business with a partner can be an exciting and rewarding experience. However, one of the most challenging aspects of starting a business with a partner is dividing equity. Equity is the ownership interest in a company, and it is typically divided among the founders based on their contributions to the business.

So, how do you divide equity in a small business? Here are some key factors to consider:

1. Determine the Value of the Business

Before dividing equity, it is important to determine the value of the business. This can be done by conducting a valuation analysis, which takes into account factors such as revenue, expenses, assets, and liabilities. Once you have a clear understanding of the value of the business, you can determine how much equity each founder should receive.

2. Consider Each Founder’s Contributions

Equity should be divided based on each founder’s contributions to the business. This can include factors such as financial contributions, time and effort, expertise, and industry connections. It is important to be fair and transparent when dividing equity, as this can help prevent conflicts down the road.

3. Plan for Future Contributions

Equity should also take into account future contributions to the business. This can include factors such as future investments, additional time and effort, and new business opportunities. It is important to have a plan in place for how equity will be adjusted as the business grows and evolves.

4. Consider Vesting Schedules

Vesting schedules can be used to ensure that founders earn their equity over time. This can help prevent founders from leaving the business early and taking their equity with them. Vesting schedules typically involve a set period of time (such as four years) during which equity is earned gradually.

In conclusion, dividing equity in a small business requires careful consideration of a variety of factors. By determining the value of the business, considering each founder’s contributions, planning for future contributions, and using vesting schedules, you can ensure that equity is divided fairly and transparently. Good luck on your entrepreneurial journey!