Equity positions can be one of the most difficult elements to setting up a partnership or adjusting it when changes occur in ownership or function.
Last week my blog post described a successful partnership that might have sounded idealistic to some. Linda and Ryando the 50/50 split without checking in to see who is actually doing more in the business itself.
It is common for partners, especially potential partners, or those in startup phase to feel proprietary about their contributions. How do you measure a product or service created by one partner? Or how would you measure the value of the partner who founded the business and ran it for a period before the second one arrived?
Can a valid comparison be made between the respective value of the chef and the operations manager in their restaurant? Are sales and marketing worth more than product design?
Can the script writer or the producer of a play be considered of equal value to the partnership? What about the designer of the technology as opposed to the investor?
Financial contributions are the easiest to value because they are inherently measurable.
Non-profits put value on both volunteering time as well as financial contribution. Often the volunteer is valued more than the money, but the money is necessary for the organization to exist. Think of Big Brothers. What good is the money alone if the volunteer is not available to donate his time and be there for a child? Which has the greater value?
Even with the most sophisticated measuring devices it is difficult to assign truly objective values to these contributions. Moreover, the measures themselves have an element of subjectivity. The problem is that decisions must be made by people whose attitudes, values and personalities vastly differ.
One way to help make the decision about equity sharing is for each partner to place a value on their own contributions and then value each other’s. There will most likely be discrepancies, but once on the table, it can be discussed and hopefully resolved at the time of the business formation. A delay may undermine both the partnership relationship and the level of success of the business itself.
Even a 50/50 split can have inherent unspoken pitfalls if it is accepted as a matter of course without taking the time and effort to have the open, honest discussions upfront. Too often, no matter what split is agreed upon, feelings aren’t expressed or addressed. In the case of Linda and Ryan and others like them, the 50/50 is based on the idea that each will do what the business needs when it needs it. They acknowledge there are times when one will be expending greater efforts than the other, but both accept the concept that in the long run, it all evens out.
No matter what the equity positions decided upon are, the partners are wise to practice ongoing, honest communication, trust in each other and ultimately be committed to the partnership relationship as much as they are to the success of the business.