Rule #4: Owner’s Equity

Dividing up the shares of your company with your partner should be addressed early on. The instinct that many people have when starting up a company with another is to say at the outset that each person should get an equal share.

But this should not be done simply as a matter of principle. The division of shares should follow one of two models.

The first is the model where both partners invest an equal amount. If both people want an equal share, then the fairest thing to do is for both to provide the same amount of startup investment.

The second model is to allot shares to each partner in proportion to the percentage of the start up investment. In other words, if one partner invests 60% of the start up, then that partner should receive 60% of the shares.

Do not confuse the dividing of shares with compensation. The compensation refers to the distribution of payment from the company’s income. The equity refers to the actual ownership of the company.

But deciding both should find its basis in objective, quantifiable things like percentage of investment. These hard and fast numbers will serve as a guideline. It is also important that you set this as a principle for our company: decisions will be made based on dollars and cents reality. By setting your business venture on a solid foundation of objective data, you will avoid the pitfalls of running your company by emotional decisions.

You may feel that your contribution to the company may be worth more to the overall company’s success than can be quantified in a financial investment. And that might be true. But this ethereal potential serves a poor foundation. It leaves too many things nebulous.

What you want is a clear and solid starting point for figuring out owner’s equity. If you start here, then as you move forward, you will be able to build a company that will last.