Agreeing the split of equity at the outset of the journey can be one of the first challenging conversations you will have, unless of course you are a sole founder. A sole founder not only avoids the need for ‘that conversation’ but they also benefit from retaining a 100% shareholding, which will make future dilution more palatable.

An increasing number of co-founders will mean reduced initial shareholdings, which in turn will mean the impact of dilution from investment will have a greater proportionate effect. This is where the size of the opportunity is important because if the potential value at exit is modest, a small founder shareholding may not generate a sufficient return to incentivise the founders, which may in turn make it challenging to raise money from investors.

We typically see initial founder equity split equally, which may be appropriate in some cases but where an equal split doesn’t reflect the relative inputs or risk being taken, it can lead to downstream challenges.

Some considerations

We encourage founders to actively think about their shareholdings in the context of the relative expertise and experience they are bringing and their relative risk. For example, if a founder is not going to play an active role in the company, it would be reasonable for their shareholding to reflect that.

Problems can arise when significant equity is deemed to be in the wrong hands. One scenario in which this can happen is if a co-founder has left the business prior to a fundraising, so having some pre-investment basic provisions around leavers and shareholding would be advisable.

We have set up a pro-forma share cap table, which you can download and use for some scenario analysis. 

Spin Outs

The issue of founder equity is paramount in the case of spin-outs. There will typically be 4 groups of potential shareholders:

  • Academic founder(s);
  • Non-academic founder(s);
  • The Education Establishment;
  • Investors.

Where academic founders are remaining in the University, the shareholding position should reflect that. As a separate point, large shareholdings for Universities can also lead to challenges when it comes to raising investment.

Tax Considerations

There are a myriad of tax issues to be considered when it comes to issuing shares. It may be possible to consider one of the investment relief schemes and particular care is needed around the Employment Related Securities Rules.

We're here to help guide you through this crucial consideration for your business. Get in touch with a member of our Tech team to find out more.