One of the major questions first time business owners might face when starting out is the apportionment of shares among partners in a new business venture.
Purpose Of Owning Shares
To understand how the amount of shares you get in a business partnership matters, you first need to understand the purpose of owning shares and the implications that comes along with it.
#1 To Represent Ownership
One of the main purposes of owning shares in a business partnership is to represent ownership in the business venture. Hence, the amount of shares you get in a business partnership should proportionately reflect the stake you deserve in the business.
#2 Ability To Appoint Directors
The amount of shares you hold would also affect your ability to have a say in the appointment of directors in your company.
This is important because each share carries a vote to elect a candidate to the board of the company who, together, control the company. If the amount of shares you own is too little to have any significant say in electing the board of the company, then you risk being relatively powerless in your own company as a minority shareholder.
#3 Profit-Sharing And Dividend Payouts
Most importantly, the amount of shares you own in a company would also determine the percentage of profits you would get when the company disburses its profits to shareholders in the form of a dividend payout.
Unless otherwise stated in the shareholders’ agreement, dividends are usually paid out equally per share. Hence, the more shares you own, the larger the percentage of dividends you would receive.
When it comes to allocating shares among business partners, what is fair and what is not ultimately boils down to the expectations and agreement reached between business partners after an honest discussion.
In conventional businesses such as restaurants and factories, the share distribution among business partners is usually more or less equal. This is because conventional businesses are unlikely to grow exponentially like high-growth start-ups do because of the high costs of expanding the business.
Hence, in order for shareholders to enjoy their fair share of profits, they would have to have more or less an equal amount of shares, usually 60-40, 51-49% or even 50-50%, with the edge usually tipping to the person who puts in more sweat equity in addition to starting capital.
However, if the disparity between what each partner brings to the table is significant, then it is also possible that equity is spilt more unevenly according to what each partner brings to the table. This could be skill, capital, experience, sweat or connections.
In the case of high growth technology start-ups, the CEO would usually take the largest stake among founders due to the immense pressure and responsibility that comes with the role.
The CEO would have to worry about the vision and direction of the company, fund-raising, investor-relations, product, sales, marketing, tech and everything necessary to make the company successful.
Other co-founders would get shares that proportionately reflect the skills and time-commitment that they’ve brought to the table.
What Is Fair And What Is Not?
It is hard to pinpoint what is fair and what is not as each business partnership has its own unique dynamic. However, what is important is that business partners discuss this at length until they come to an agreement before embarking on the business venture to prevent any disagreements or jealousy that might arise in the future.
As a general rule, partners who sacrifice more in terms of sweat and hard work tend to get more than partners whose only commitment to the business is monetary. This is because the business will not be able to function without the full-time commitment from partners who put their blood and sweat into building the business.
However, things might be different if the partner putting in the sweat and effort is inexperienced while the partner putting in the capital is far more experienced and has the network and resources required to make the business venture a success without having to break a sweat because of their previous success in the same field.
Ultimately, it all boils down to what each partner brings to the table and the agreement reached between them.
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