The Free Startup Equity Calculator 📱

Starting up is a lot more than just coming up with a great idea. It’s also about understanding the financial and equity side of things, and one of the most important pieces is figuring out how to calculate startup equity.

Equity is an ownership stake in a company that you may have gained through investing in it or by working for the organisation. This means that when your business turns a profit, you can benefit from the profits as a shareholder.

So, how do you calculate startup equity? Or better, how much equity does each founder get?

Here's a guide.

What Is Founder Equity?

Founder equity refers to the percentage of ownership that a startup's founders have in the company. It's important for entrepreneurs to determine how much equity each founder will get, as this will affect their rights and responsibilities within the organisation.

Founder equity usually dictates:

• How much voting power each founder has
• How much of a say each founder has in important decisions
• Who is entitled to the profits generated by the business and how much

What Is The Equity Split?

The equity split refers to how the founders decide to divide up their company's equity among themselves. This process can be complicated, and it is essential for all parties to agree on a fair split.

Generally, each founder will get an equal amount of equity unless there are certain circumstances that dictate otherwise (such as one founder investing more money or bringing in another partner).

Factors Affecting The Equity Split

Founder equity is a sensitive topic, and it is important to consider all the factors that go into determining how much equity each founder will get. Here are some of the most common variables:

• Capital: Probably the most significant factor, the amount of capital invested by each founder into the business should be taken into account.
• Responsibility: The level of responsibility for each founder is also an essential consideration in determining equity.
• Skill Sets: Each partner's individual skills and expertise can have an influence on how much equity they get. For example, a tech or finance expert may receive more equity than someone with a marketing background.
• Time Commitment: Another factor to consider is the amount of time each founder is willing to commit to the business.
• Importance: What if one founder is more important to the success of the business than the other? It's essential to consider this when calculating equity splits. For example, there could be cases if one founder leaves and it could lead to the failure of the business.

Calculating Startup Equity

Once all these factors have been considered, it's time to calculate startup equity. Generally, this is done using a percentage-based formula. It can be as simple as each founder getting an equal share of the company or could involve more complex calculations depending on the circumstances.

Here are three methods you can use to calculate founder equity:

Method 1: Equal Split

The simplest and quickest way to calculate startup equity is by having each founder get an equal share of the company. This works best for a small team with equal capital investments, responsibilities, skills sets and time commitments.

Also know that equity split is for long term. That is, it should be structured in a way that sets the founders up for long-term success.

Method 2: Weighted Equity Split

A weighted equity split is based on each founder's contributions to the business. For example, if one partner has been contributing more capital or time to the business, they may receive a larger share of the company. This method requires careful consideration of the individual contributions and skills of each partner.

Method 3: "Pie Splitting" Model

The pie-splitting model is similar to the weighted equity split, but it takes into account fewer factors. This approach looks at three variables—responsibility, capital investment, and skill set—and assigns each founder a point value for each factor. The higher the score, the more equity each founder will receive.

Tips To Calculate Startup Equity Better

Calculating equity isn't easy, and it's important to take your time when figuring out the split. Here are some tips to help make the process smoother:

• Have a clear understanding of the value each founder is bringing to the table. This will ensure that everyone gets an equitable share of the equity pie.
• Keep in mind that startup equity should be split according to the long-term goals and success of the company. For example, don't be frugal with equity if it will lead to the failure of the business.
• Use a cap table—a spreadsheet or other document that outlines how much equity each founder owns in the business—to keep track of equity split changes.
• Be sure that everyone is on the same page about the equity split and have it documented legally to avoid potential future disputes.
• Ensure you have a clear exit strategy in place for founders who leave the business before it becomes profitable. This will prevent disputes down the track.