#equity split

                                                                                   From Mike Moyer via Built In Chicago

The Right Way to Do the Splits

In early 2013 Joe Lucchese decided he needed help launching Pro-Ject, an event company that brings innovators and influencers together for social experiences. He didn’t have much trouble enlisting the help of five cofounders, each willing to work for equity instead of cash. Lucchese put together a basic agreement that allocated equity among the partners based on their ability to work on the company going forward. He set his share a 51% and divided the rest over the other five partners. “I was really excited to have a team,” remembered Lucchese, “but it didn’t take long to realize I had made a mistake.”

It became apparent that the team members had different commitment levels to the project and the equity allocations didn’t make sense. Some, who were willing to work more, were demotivated because of their small number of shares; and others with larger allocations didn’t contribute as expected. Team members looked to Lucchese to pay their expenses, but he had thought they would chip in as well.

Fixed equity allocations, like Lucchese’s, are extremely common, but potentially hazardous. The inevitable changes that a startup goes through force founders to renegotiate equity splits which can cause irreparable harm to working relationships. It’s impossible to predict everything the company will need to be successful in advance; and, therefore, impossible to give the right slices of the pie to the people who contribute.

“We pulled off our three events and they were great, but the team wasn’t properly motivated and I and I was growing less and less optimistic about the future,” confessed Lucchese. Shortly thereafter one of his partners introduced him to the concept of a dynamic equity split. Unlike a traditional fixed split, like the one he had used, the dynamic model allowed Lucchese to allocate equity on a rolling basis in proportion to what team members actually contribute. Under the new model every participant had exactly what they deserved. According to Lucchese, “it was a life saver; I was able to reorganize the team under the new model and things really picked up.” Using the new model team members, including Lucchese, were motivated to contribute on an ongoing basis. Those that weren’t interested in being held accountable dropped out and the dynamic model simply adjusted to reflect their departure. Shortly thereafter Pro-Ject produced their forth event in Las Vegas with tremendous success. 

“The dynamic model that we used is called a ‘Grunt Fund’,” explained Lucchese, “it allows us to calculate a relative value for the various contributions including time, money, ideas, relationships and other resources. At any given time a person’s share is equal to what they contributed divided by the sum of everyone’s contributions. We found an attorney who created a simple agreement and helped us navigate the tax issues with no problem.”