How to split the equity fairly in your Singapore startup

dividing ownership startup

Ah, equity. The ever-elusive reason why startup founders and employees are willing to work for peanuts.

It’s a common question posed by most startup founders. How do we allocate ownership in the company in a fair and just manner?

While this tends to be a delicate conversation point for entrepreneurs, we suggest hashing this out as soon as possible. Deep thought should be given to the roles the different founders will play and fairness should be the name of the game when striving for an equitable equity split (see what I did there).

The endless number of ways in which startups take shape can often make the perception of fairness in dividing ownership quite the dilemma. What happens when there’re four founders, two of which are willing to quit their full-time jobs to be the CEO and sales/marketing guru, one is the tech guy who developed the product but still wishes to work full-time in his software development job, and one intends on handling the CFO role but similarly wishes to work full-time in his professional capacity? What portion of equity should be set aside for future employees? There are also different considerations to be had, depending on whether the startup intends to bootstrap or raise venture funding.

As you can see, careful thought is needed to come up with a structure that’ll please, or at least satisfy, everyone.

Here are some of the more important considerations for you to think about.

1). Which founder(s) will be doing the bulk of the work?

A premium should be placed on sweat equity when deciding how to allocate shares. While this may be difficult to ascertain at the stage the startup is formed, a good place to start is to look at the immediate plans of the startup founders.

If one person intends to quit his full-time job to concentrate on the new venture, this entails taking much more risk than that of another founder who is only willing to work part-time until things take off. Generally, the CEO should receive the largest stake in the company and work full-time in the company.

However, there are also other considerations in play. The value of the contribution is also an important factor. While my opinion is that it is short-sighted to view the role business founder(s) play in a technology startup as less important than that of the technology founder, others might think otherwise.

2). Do you intend to bootstrap or take in investors?

You have a whole lot less to think about if you intend to bootstrap your company to profitability. In this situation, you only have to divide the ownership among the original founders and employees.

However, if you plan on raising capital from investors, you can consider setting aside equity for investors from the start or issuing equity in the future. This shouldn’t be too much of an issue either way as all the founders will be diluted equally if capital is raised from investors in the future.

3). Implement a vesting schedule

Regardless of how the equity is divided, all shares should be subjected to vesting restrictions.

This is something that is so important, I’m going to repeat myself again. Regardless of how the equity is divided, all shares should be subjected to vesting restrictions.

Vesting restrictions basically mean that all founders have to stay with the company for a certain period of time before receiving unfettered ownership of their portion of equity. Many first-time entrepreneurs view this as somewhat harsh. While this may not seem like a big deal at the start, you never know how things will change in half a year to a year. In a startup, you should expect that anything bad that can happen will happen.

Life situations and circumstances can change in the blink of an eye. Without vesting restrictions, a founder with a 25% stake in the company can quit within a month and still own a quarter of the company. By vesting founder equity, you can ensure that a founder doesn’t leave while he or she still retains a large portion of the company.

How you vest is up to you, but typical schedules have a one-year cliff, vesting over a period of four years. For example, if you own 5000 shares in the startup and you are entitled to 25% per year with a one-year cliff, you’ll receive 1250 shares after a year. The “cliff” refers to the fact that if you leave before the year is up, you won’t receive anything at all. Many vesting clauses are structured such that you’ll be entitled to a pro-rated fraction of the remaining shares on a monthly basis after crossing the cliff.

4). Implement an employee options pool

You can’t build a company in a vacuum. If your startup takes off, you’re probably going to need to hire employees to help you bring your startup to the next level. It’s useful to have an employee options pool for key early employees to keep them motivated in line with the founders. Generally, most startups set aside 10-20% of equity for the employee option pool.