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About 8 years ago equity broke my business and severed one of the best friendships I ever had. If we would have set things up more fairly in the beginning this all would have been avoidable. Instead we had to dissolve the business and abandon the brand we both worked so hard to create.
In case you’re not familiar, your “equity” refers to how much you own of a business. In the startup world it’s what I might want to pay you until we start making cash. Equity is kind of like a promise for future cash. If you work for me for equity I’m promising you I’ll try to make it worth a lot some day when we sell the business or some other financial event occurs.
In my opinion the only fair way to do equity is something called the Dynamic Equity Split. Instead of equity being divided up in the beginning (too early) or when investment comes (too late) this method divides up equity as the company is built. Equity is dynamically based on the quantity of resources each person puts in.
So as a simplified example, if we both work the same amount on a startup for month #1 we get 50%. If I stop working and you’re the only person who works month #2 you then own 2/3 or 66.7% of the startup. If I still don’t work on month #3 and you work the same amount you’re going to end up owning 3/4 or 75% of the business, and so on.
In order to actually implement this in practice, the system is going to need to get more complex. We’re going to need to answer the following questions:
- If you leave the business do you get to keep your equity?
- If one of us is a Jr. employee and the other is Sr. do we earn equity equally?
- If one of us puts in cash or equipment how does that impact equity?
- If one of us gets paid a little cash to live off of, how does that factor into equity?
- What happens when investment comes along?
- Is there actually a legal way to create a company where the equity is dynamic?
I’ve got the answers to all these questions, and I put it into a free 6-day video course that will change the way you look at equity. To get the next video just give me your email using the form below and I’ll email it to you. Don’t worry, I’m not going to send you too many emails, and I will respect your privacy.