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Mechanisms to determine ownership or economic interest

Various methods can be used to determine ownership, such as:
  • Equal division of interest depending on the number of partners.
  • Division on the basis of effort – A part-time co-founder or a co-founder who is not working on the core tasks such as product creation or marketing/ selling get a different share from those performing core activities.
  • On the basis of the amount of capital contributed – This decision ignores future ideas, efforts and contributions which may vary across different co-founders.
Ideally, a combination of the above methods should be used to determine economic interest. Hence, the amount of capital contribution, amount of effort, relative value of the task or responsibility taken up by the co-founder and ensuring that some level of parity is maintained amongst the different co-founders’ are key factors to determine the equity split.
Note that at an early stage it’s difficult to stay how long the co-founders will stay committed – it makes sense to define a minimum commitment period – if a co-founder leaves before the commitment period or is expelled or is unable to devote himself to the work of the business, he or she will lose all economic interest in the business. 

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