Why Getting the Equity Split Right Matters for Startup Co-founders

Splitting equity correctly in a startup is a fairly complex and highly individual process that depends on the specific circumstances of each company and its members. Startup founders should pay particular attention to this aspect, as it can be decisive for the successful development of the business and for stable relationships among co-founders. A proper equity split in a startup can affect:

• Co-founder motivation and engagement: a fair split encourages employees and co-founders to put in the effort needed to achieve the goals and objectives set;
• Conflict prevention: a proper equity split reduces the likelihood of conflicts;
• Successful talent retention: talented employees will have a strong interest in and attachment to the startup when equity is split fairly;
• Attracting investors: investors are interested in funding projects where equity is split properly;
• Future company growth: a fair equity split in a startup can contribute to the company's successful development, as every co-founder will share a common vision and work toward common goals.

To ensure a fair and effective equity split, startup founders are advised to consult legal and business professionals and to record all agreements and agreed terms in the relevant legal documents (for example, in the company charter).

It is worth noting that unequal equity splits among startup co-founders are not uncommon. However, such a split must be justified. Factors that may lead to an unequal split include:

• Contribution to the idea and its creation. The founder who came up with the idea for the startup and worked actively on building it may hold a larger stake. This can be justified, especially if the idea became the starting point for the entire business.
• Technical skills and contribution. If one of the co-founders made a particularly valuable technical contribution by developing key technologies or products, they may be granted a more significant stake in the company.
• Financial contribution. A founder who has put more money into the startup may expect a larger stake. This may include the initial capital to launch the business or additional investment at later stages.
• Experience and professionalism. If one of the co-founders has extensive experience that may be key to the startup's success, their contribution in the form of experience and skills can be taken into account when splitting equity.
• Roles and responsibilities. The equity split may reflect the different roles and levels of responsibility of each co-founder. For example, the CEO or CTO may hold a larger stake than other team members.
• Risk and personal circumstances. Some co-founders may take on greater financial or professional risk, which may be reflected in their stakes in the company.

A proper equity split also plays an important role once the business is up and running. Disagreements between founders can give rise to so-called “stalemate situations” (deadlocks), which can paralyze business processes. Such situations arise not only when equity in a startup is split equally (50% to 50%), but also when a decision requires a number of votes set by law or by the charter. For example, at the Astana International Financial Centre, where many startups register their legal entities, some cases require a Special Resolution, which needs at least 75% of the votes.

It should be noted that a poorly designed equity split mechanism can lead to low motivation among co-founders. To address this, a company's founders can subject their shares to vesting to ensure long-term commitment. Vesting is a process under which ownership rights (for example, to shares or options) are acquired gradually over a set period of time (for example, 4 years). This mechanism is typically applied to shares or options granted to a company's employees, founders or investors to encourage their long-term involvement in the company. Thus, vesting can prevent potential problems if one of the founders decides to leave the company early.

As we can see, startups should pay particular attention to splitting equity correctly from the very start of building their business; otherwise, it can lead to serious problems within the team, create conflicts and threaten the company's long-term sustainability. Notably, Activat VC, a venture company, has been investing in startups since 2014 and has built up expertise on many issues, including how to split equity correctly. We help our portfolio companies scale and enter new markets not only through monetary investment but also through our expertise and established partnerships.

Author: Almas Serikuly, Lawyer at Activat VC