As a novice in the entrepreneurship space, it can be hard to understand how corporate ownership works. The typical impulse founders seem to have (including myself for a time) is to try to maintain as much ownership and/or control as possible, for as long as possible. No one wants to be fired from the company they started. No one wants to fall victim to a hostile takeover, be outmaneuvered by activist shareholders, or be forced to sell to a competitor with a non-aligned philosophy. No one wants founder disputes around ownership to ruin relationships.
Eventually one begins to understand that the impulse for control at the expense of others is in conflict with an important conception of fairness.
This conception of fairness can be captured in with the following list.
1. We want our ownership stake to reflect the work we've done to make the company what it is.
2. We want the risks we have taken and the opportunity cost in pursuing the endeavor to be reflected as well.
3. The same applies to everyone else (including non permanent members) who, in whatever way, has contributed.
4. Would I work for someone who knowingly and overtly takes advantage of me? Probably not.
5. Should I expect others to knowingly let me take advantage of them? Probably not.
Any equity split based on predicting the future will necessarily deviate from this conception of fairness.
Sometimes the world will force such deviations on us (for example, a potential investor requires X% ownership at valuation Y in order to contribute needed funds) and we may find it justifiable to accept.
However, to the extent possible, fairness should be opted for.
So far, the only fair method for determining equity we have come across is "Slicing Pie" developed by Mike Moyer.
The basic idea is that ownership share is determined as the cumulative work ("slices") contributed by each member divided by the sum of the cumulative work of all members.
One can accumulate slices either by spending time working toward company goals, or by contributing cash directly (paying for goods and services, funding the company bank account, etc.).
The conversion of time-spent to slices-accumulated depends on the hourly rate at a hypothesized fair-market salary.
The conversion of cash contributions to slices is more favorable than time contributions for reasons having to do with tax burdens.
Precise weighting factors for cash and non-cash contributions exist, though updates may be argued for.
While the method was specifically designed for the bootstrapping stage, it is clear to us that its potential goes much further.
NOTE: (the slicing pie logo was used without permission - it was downloaded from https://slicingpie.com/)