November 15, 2021

Start-Ups: Allocating Founders’ Shares

Deciding how to divide the pie among a start-up’s founders is a delicate process. While the simplest option for a business with multiple founders is to divide ownership stakes equally, that can cause problems down the road depending on how the business & the founders’ respective roles in it evolve. This Foley blog lays out some ideas that should be considered in order to help reduce the risk of future problems resulting from the initial allocation decisions. Here are some of the matters the blog suggests need to be taken into consideration:

– What is the level of risk the founder is taking? The level of risk is one of the most significant points to consider. If a founder is leaving the security of a full-time job to work on the startup exclusively, that would be a higher level of risk than someone simply doing this on the side.

– What is the level of contribution of the founder? What is their role within the firm? Along with determining allocation, founders must clarify their roles and the level of expectation of each person. Someone taking on a CEO role would likely have a greater level of contribution daily than a founder who serves in a more advisory or consulting role. Those with a higher level of contribution or a more active role would receive a greater stock allocation.

– Who developed the idea or concept? Who developed the intellectual property? This is another crucial issue. Founders who were directly involved in the concept development and development of the IP should be rewarded with a larger percentage of the stock.

Other factors identified include the role individual founders played in putting together the business plan or securing investors, and the stage in the company’s development at which a particular founder joined.

John Jenkins