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‘Founders Pie Calculator’ offers a more nuanced way to determine equity shares

By Jesse Schwartz
Published: February 14th, 2018

So you’re getting a start-up going, and it’s time to divvy up the equity shares among the four partners. The most logical thing to do is to award 25% to each of the partners, right?

Wrong, says Frank Demmler, adjunct teaching professor of entrepreneurship, Donald H. Jones Center for Entrepreneurial Studies at the Tepper School of Business at Carnegie Mellon University.

“I’ve been doing what I’m doing since 1984,” he says. “More than 50% of the time people have done the [equity] division equally, and I’ve seen how flawed that was and how detrimental it was to the company at critical times.”

The reality, he underscores, is that not all partners contribute or participate equally. For example, one worker may work from 7:00 a.m. to 7:00 p.m., while another might saunter in at 10:00 and leave at 3:00. Or, you may quit your job and have no salary, while the other partners keep theirs and offer funds until the company can pay them. One partner may want to raise investment funds, while the others want to avoid the risk.

Beyond that, Demmler points out, some partners may simply bring more to the table than others. Accordingly, he has come up with a number of questions the partners should ask themselves, such as:

  • Who did what to come up with the business idea?
  • Who contributed what in conceiving the business model?
  • Who has the industry connections?
  • Who is joining the company full-time?
  • Who is responsible for bringing the product to market?

These and other essential questions were woven by Demmler into a tool he calls the “Founders Pie Calculator.” It works like this: First, several variables are given a “weight,” or an evaluation, from 0-10. These variables are: Idea, Business Model, Domain Expertise, Commitment & Risk, and Responsibilities.

The weights can be compared to each other in addition, to make sure their relative values make sense.

Each of the founders can then also be rated in each of these areas. The numbers are entered into respective matrices. Then each of the Founders’ points are added up, and calculated as a percentage of the total points, indicating a recommendation for an appropriate percentage of ownership.

A detailed article with examples appears in the January issue of Technology Transfer Tactics. To subscribe and get the full article, as well as the publication’s 10-year online archive of success strategies and best practices for TTOs, CLICK HERE.

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