How to divide up equity

Seth Godin has an interesting take on dividing up equity. Technically, equity is the assets minus the liabilities of the company. The main thing with equity is that it decides who makes the decisions. When few people have all the decision making ability, the company takes on their personalities. If it’s Steve jobs, this can be a good thing. If that someone is timid or does not believe in the company or just isn’t an entrepreneur, it’s a bad thing.

You can get equity in two ways. One, you just put up money. The other is sweat equity. Now that the barriers to start a company are much lower, you see this a lot more and more than one person may be working for free to divide up this equity. This can become a problem when one person feels like they’re working harder or does not feel like they’re making any decisions.

Seth has an interesting idea. “Today, right now, your contribution is worth 5% of the company and my creation of the company is worth 5%. The other 90% is based on what each of us does over the next 18 months. Here’s a list of what has to get done, and what we agree it’s worth…”

He also suggests assigning an arbitrator to decide this stuff. Personally, I don’t think this works. Too much gray area. The real issue is that people try to bend the business around themselves. This is bad. The E-myth by Michael Gerber does a great job of explaining this flaw.

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