9 Effective Equity Sharing Strategies in Startups
Deciding on an equity sharing strategy is a critical step for startup success, as evidenced by the diverse experiences of CEOs and founders. From weighing the pros and cons of employee equity to considering a 70/30 split and its buyout outcome, we’ve curated nine insightful responses to guide you through the equity decision-making process.
- Employee Equity: Pros and Cons
- Bootstrapping Without Employee Equity
- Structured Equity for Founders and Employees
- Fair Equity Distribution by Contribution
- Aligning Interests with Equity Incentives
- Equity Based on Contribution and Transparency
- Dynamic Equity Pool Boosts Retention
- Tiered Equity Model for Team Cohesion
- 70/30 Split and Buyout Outcome
Employee Equity: Pros and Cons
I have established equity-sharing structures for employees, co-founding partners, and non-co-founding partners and can safely say there is one model that worked head and shoulders above the rest.
Firstly, employees. Getting your staff bought into your startup idea by sharing a piece of the pie is great on paper but less so in practice. Firstly, anyone you’re recruiting who has actually been around the block doesn’t pay much heed to these share options, and that’s because they know the dirty little secret – having the options is worthless until they are exercised. Meaning, unless the company is sold or listed, they have absolutely zero chance of making anything from their share options. What’s more, the legal conditions that can come with share options can make it so difficult to actually exercise them that they become worthless anyway.
And so, focusing on employee share options can be to your detriment. Usually, the only people excited by these are quite ‘green’ and less experienced, meaning that you actually unwittingly end up proactively recruiting less experienced people. Focus on recruiting people with a genuine and clear passion for your product/company/sector rather than the superficial lure of share options.
For start-up founders, I have tried everything from a formal structure of different percentages of equity that vest over time depending on when that founder entered the startup, to a simple 50/50 split. No prizes for guessing what works best – the 50/50 split.
When you have a straight 50/50 split, even if the effort or expertise is not precisely 50/50 in reality, whether you know it or not, you are entering into an informal agreement between yourselves that you’re in this for the long haul. There is mutual respect, and you both agree to have the long-term goal in mind, not a short-term focus on how much equity each is attributed.
This drives the right behaviors and ultimately enables much more level-headed strategic decision-making. This drastically increases your likelihood of success and the ability to actually generate cash from your equity stakes in the long term.
Jonny Pelter
Chief Information Security Officer (Ciso) and Founder, CyPro
Bootstrapping Without Employee Equity
As 50/50 partners with no outside investors, my co-founder and I didn’t raise money, thus never built out a cap table with spots for employee equity. Had we offered equity in the early days, we might have been able to land some bigger hires, but looking back, I think we’re happy that we stayed small, scrappy, and bootstrapped. Instead of giving up equity, we offered remote work privileges before they were the norm, paid for expensive trips across the world for employees, and hired young people who didn’t have huge compensation requirements.
Sure, they asked for equity, but ultimately, my co-founder and I took all the financial risk, and the legal fees to restructure our equity were too much to bear for a small bootstrapped business. The decision to retain all the equity also made things super simple. I’m happy to say I’ve never sat in a board meeting, had to answer to a VC, or been pressured into anything by minority shareholders. We’re grateful for all the people who helped us build this company, and we wouldn’t change anything about our story.
Matt Wilson
CEO, Under30Experiences
Structured Equity for Founders and Employees
We decided on our equity-sharing strategy by considering key contributions and long-term involvement. We followed a structured approach:
Founders’ Agreement: We outlined roles, responsibilities, and future commitment levels.
Advisor Equity: We allocated a small percentage for advisors who offered strategic guidance.
Employee Stock Option Pool (ESOP): We reserved 15% for key hires to attract and retain top talent.
This strategy ensured fairness and motivation. The outcome was positive: it aligned everyone’s interests with the startup’s success, attracted high-caliber talent, and fostered a strong, committed team culture. Our balanced approach helped secure early funding and build a resilient, growth-oriented team.
Bhavik Sarkhedi
CMO, Write Right
Fair Equity Distribution by Contribution
We decided on an equity-sharing strategy by focusing on each founding member’s core strengths. We evaluated our individual contributions, considering expertise in key areas such as marketing, operations, and finance. We aimed for a fair distribution that would incentivize everyone to drive the business forward.
Implementing this strategy, we allocated equity based on initial investments and anticipated value additions. We documented everything clearly, ensuring transparency and minimizing future disputes. Each member’s equity stake reflected their role and expected impact on the company’s growth.
The outcome was positive. Our clear equity distribution fostered a strong sense of ownership and commitment. We avoided conflicts and maintained alignment on our goals.
Patrick Calman
CEO, Polar Engraving
Aligning Interests with Equity Incentives
When we decided on an equity-sharing strategy for Parachute, our goal was to align the interests of key stakeholders with the company’s long-term success. We extensively discussed with advisors and early team members to determine the best approach. We wanted everyone involved to feel invested in the company’s future and motivated to contribute to its growth.
We chose to offer equity to early employees based on their role and contributions. This attracted top talent and fostered a sense of ownership and responsibility. It was important to us that equity distribution was fair and transparent. We used a vesting schedule to ensure that commitment and performance were rewarded over time.
The outcome was highly positive. The equity-sharing strategy helped us build a dedicated and motivated team. Employees felt valued and were more engaged in their work. It created a culture of collaboration and innovation, driving Parachute’s growth and success.
Elmo Taddeo
CEO, Parachute
Equity Based on Contribution and Transparency
Our first major decision when setting up our business was to share ownership. This step required thorough consideration so as to retain the most valuable employees. Initially, we researched and asked people who had been in this situation before for advice.
We decided that equity would be distributed based on contribution and responsibility. Share allotment depended on how much time and money entrepreneurs invested at the beginning. We also left some portion of equity for future staff to help us offer competitive compensation.
Transparency was central to our strategy. Everyone knew the reasons behind their part of the company pie and how it matched their team roles. It increased trust and motivation in my team.
Through an obvious and equitable equity distribution system, we retained professionals with a strong commitment. Moreover, there were no ownership disagreements because everyone understood the rationale behind each decision.
Fahad Khan
Digital Marketing Manager, Ubuy Nigeria
Dynamic Equity Pool Boosts Retention
Our equity-sharing strategy focused on aligning long-term interests and incentivizing key contributors. We implemented a dynamic equity pool, allocating shares based on predefined milestones and performance metrics. This approach ensured that equity distribution reflected ongoing contributions rather than just initial roles. We also introduced a vesting schedule with a one-year cliff to encourage commitment. The outcome was remarkable: Team retention improved by 40%, and we saw a 30% increase in overall productivity. This strategy fostered a sense of ownership and motivated employees to think like co-founders. It also attracted top talent who were drawn to the potential for significant equity upside. The key was transparency in the allocation process and clear communication of the equity’s potential value.
Lee Odierno
Personal Injury Lawyer, The Odierno Law Firm, P.C.
Tiered Equity Model for Team Cohesion
We implemented a tiered equity-sharing model based on risk and timing of joining. Early employees received larger equity stakes with longer vesting periods, while later hires received smaller stakes with accelerated vesting. This balanced approach recognized the higher risk taken by early joiners while still providing attractive incentives for later talent. The outcome was a 55% improvement in our ability to close key hires and a 25% reduction in early-stage turnover. It also created a culture where the timing of joining was respected, reducing potential resentment between early and later employees. This strategy proved crucial in maintaining team cohesion through our rapid growth phases.
Alex Begum
Texas Personal Injury Lawyer, Villarreal & Begum, Texas Law Guns
70/30 Split and Buyout Outcome
We initially agreed on a 70/30 split for a direct-to-consumer (DTC) incubator. I would be responsible for the work, while my partner would fund our startup.
My partner brings value through his factory connections and his existing brick-and-mortar business, which we assume is enough to get everything together.
However, this arrangement proved ineffective because we didn’t specify the necessary funds from the start.
We began with an estimate, which was fine, but we faced constraints due to a lack of manpower on a daily basis. This resulted in us needing more physical assistance to hire staff.
In the end, I had to buy out the rest of the business. This situation eventually became unsustainable as startups require more than just money.
Victor Hsi
Community & Social Media Manager, UGC Creator
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