Startup founders have been advised that strategic decision-making around equity allocation can pave the way for sustainable growth, enabling them to maximize the potential of their startups while retaining significant value for themselves and their team.
A corporate law expert, Akpor Ikogho, Founder/CEO, Mark Renee LP, a corporate law firm headquartered in Lagos, stated this in a chat with newsmen.
While speaking on mistakes startup founders make and also proffering solutions, lkogho said that wrong distribution of shares could stall the business at N10 million mark and eventually lead to erosion of shareholders value.
He listed some of the pitfalls to include dividing all equity upfront, absence of an employee equity pool, giving up too much equity to investors in the early days of the business, not accounting for sweat equity and too frequent capital raises or raising more than needed, among others.
By avoiding these common mistakes in equity allocation, he said that startup founders could safeguard the long-term success and value of their ventures.
"Engaging in open and honest conversations with co-founders, establishing clear vesting schedules, and creating employee equity pools, are vital steps toward building a thriving startup.
"Also, recognising and appropriately valuing sweat equity contributions ensures that all stakeholders are incentivised to contribute to the company's growth," he said.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
According to him, "Many founders avoid the hard conversation about individual contributions and commitments by splitting the equity evenly up front. This can lead to some problems and is how you get "Zombie Founders"-- holders of significant equity in your startup that don't contribute to the company.
"Building a strong team as a startup while bootstrapping is incredibly hard. Most founders cannot afford to pay the best employees in cash so they often resort to stock option schemes.
"If you don't set aside some equity in an equity pool for employees, you may be faced with a situation where co-founders refuse to give up shares that have been divided up equally at the beginning and thus have to rely on employees who ideally would not be for the first pick.
"Giving up too much equity too early on in the process can be a mistake for a number of reasons. For one, it can limit your ability to raise additional funding. Giving away too much equity can also significantly dilute a founder's ownership stake."
"At Mark Renee, we encourage our clients to have the difficult conversation with co-founders up front and make sure everyone is on the same page. We also advise that founders work out the levels of contribution and commitment each founder can provide. All the fine details can be covered in a vesting deed or founders agreement.
"We also advise that startup founders make absolutely sure that all founders' shares are vesting with at least a 12-month cliff.
"This means that if one of the co-founders can't deliver value, can't give up prior commitments or simply loses interest before the year is out, remaining founders can let them go without having to buy out their equity, issue new shares or start a new company," Ikogho added.
