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Equity allocation among the founders of a startup or a SME is crucial. In most cases, the initial capital of a startup is divided among two or three founders. Technical and commercial skills together represent about 75% of the capital, while administrative and financial functions represent the remaining 25%. It is essential to find co-founders with complementary skills and ensure personality compatibility. If adjustments in capital distribution are necessary, it is recommended to seek expert advice to avoid legal, financial, and relational complications.
E. Krieger
In the field of entrepreneurship, it is wise to reflect on the African proverb that says, « If you want to go fast, go alone. If you want to go far, go together. » While it is almost always advisable to find teammates to undertake a long journey, the issue of sharing the profits of the venture is far from insignificant. Therefore, how should the capital be distributed among the founders of a startup?
When launching a business, the challenge is often to work with the best while having limited resources at the beginning. Therefore, it is often necessary to share the capital so that the whole is greater than the sum of its parts.
The founder usually has a technical or business profile and will need to seek complementary skills. Ideally, a team of founders should have the following profiles: 1) a visionary, 2) an « engineer » for R&D and production, 3) a businessman for marketing and sales, and 4) a sort of « Shiva » for back-office, administration, and finance.
It is easy to understand that one person can embody several of these components, but rarely all of them. Therefore, you will need to search for partners.
How to distribute this capital among the founders at the beginning?
We conducted a study with 167 startup leaders. In three-quarters of the cases, there are two or three founders.
The technical and commercial functions have roughly the same weight and together represent nearly 75% of the capital. Indeed, while it is essential to develop and industrialize an offering, it is equally essential to promote and sell it!
The CEO function and administrative and financial functions represent the remaining 25%.
In general, when there are two founding partners, the one who will also take on the CEO role, in addition to their technical or business expertise, will hold around 60% of the shares, as they are often the one who will carry the company on their shoulders.
How to find the right people to partner with?
Sometimes, the desire to carry out a project with one or more close individuals with complementary skills preexists the creation of a startup.
If you don’t have the chance to assemble the team from the beginning, you can look among alumni networks or participate in networking events.
The golden rule is to multiply connections to find the rare gems! Then, it is essential to ensure that personalities work well together, beyond complementary skills.
When you make a mistake with the casting
This is the most challenging point! Many businesses disintegrate because the founders cannot get along in the long run. However, this is not necessarily a disaster: once you catch the entrepreneurial bug, you will quickly embark on a new project, strengthened by the experience you’ve gained.
Nevertheless, if you are not the « exiting » partner and you wish to continue the adventure, you will need to come to an agreement with the departing partners to acquire their shares without the financial burden becoming unbearable for you and/or for the company itself.
If your company is still in the creation phase, the exit of a partner can be done « at nominal value, » at an amount equal to or close to the initial investment. This is only possible if no significant development has occurred in the meantime and if the founders have carefully anticipated this scenario.
However, when your company is valued at several million euros, reconfiguring the capital will either be homeopathic (on the order of a few percent for you) or very expensive.
The potential entry of new financial partners may then become necessary. If the process is emotionally charged, consulting lawyers and financial experts is strongly recommended because makeshift solutions could lead to costly problems and result in blockages.
Evolving the capital: a delicate process
Apart from scenarios involving the departure of a co-founder, it is sometimes necessary to evolve the capital with the help of external investors when non-dilutive financing (debt, grants, and other advances) is insufficient.
This changes the control of the company and the definition of its goals and development paths. Once again, seeking experts is recommended to objectify the debate and avoid deadlock situations. It will be essential to preserve both the motivation of the leaders and the cohesion of the shareholders.
Ultimately, the ownership of a startup or SME goes far beyond issues of dividends or capital gains from sales. Beyond understood interests and potential power struggles, it is necessary to create and maintain a shared vision and values. The greatness and servitude of the entrepreneurial job…
