Hacking the 50-50 Equity Split Using SHAK

I first came across SHAK two years ago.

My flatmate and I had just moved into some newly built rental accommodation.  We’d expected the rooms to be of equal size, but after measuring up, it turned out one room was significantly bigger than the other.  Prior to this we’d decided to split everything evenly – $850 each.

So we have:
Expected Room Size:
50/50
Cost:
$850/$850

Using ACTUAL room size information it looked more like:
60/40
?/?

And so we have our problem:

How could we place a fair value on the additional space which we  would both find acceptable?

SOLUTION:
SHAK: An informal auction with two opposing constraints.

Starting at $850, open bid, no fixed increments.  Other player can call a stop at any point and last bid in gets the room.

I went first with $850, he topped with $860, eventually I went $980, he topped with $990.  I threw in the towel.  The room just wasn’t worth that much to me.
(Note: He got the room from the auction, but due to funding constraints, we ended up switching and I got it for the $980 a week later.  I didn’t mind and yes, it was worth it :) ).

Adapting SHAK to decide fairest Equity Split

I’ll now go over how I used this exact method to allocate equity with the cofounder on my latest start-up.

Note: For the SHAK method to work you always need a counter constraint.  The example above had Room size vs. Cost.

We were not quite “Ramen” on the start-up so we had a bit of cash to burn.  Let’s throw up a monthly total wage packet of $2000 for the two of us.  And we agreed to have an equal say in the business regardless of equity share, which was reflected in the final contract.

So now we’re trading:

Total monthly wage packet vs. Equity share in the start-up

That’s the trade off.  so that’s what we worked with.

Either take more money now, or take a larger share in the pie on exit.  Of course, you may use different constraints based on the particulars of your situation, but you’ll always need at least two opposing constraints as I mentioned above.

Balanced Starting Values:
Fair Wage:
$1000/$1000
Fair Equity Split:
50/50

I’ll skip the details on this one, but let’s just say it was insightful!

In the end, since I had some heavier financial commitments, I took a 45/55 for $1200/$800 wage share.  That effectively priced 5% of equity at $200 which meant 1% is $40 a month.  Or 1% equal to $480 a year, valuing the business overall as $48,000.  Not bad and about right i’d say.

That’s SHAK in a nutshell.  It calculates the equity split and you get a bonus business valuation too.

FINAL THOUGHTS

The SHAK method is the only fair way i’ve come across to distribute equity amongst cofounders, other than, of course, the basic 50/50 split.  It’s worked out great so far for the two of us and we’re both still here!

I’ll be using it on my next start-up and have recommended it to other start-ups with success.  I’ve never seen it used with more than two founders, but it should be manageable with a few tweaks.  (I’ll cover this scenario in another article if there’s enough demand in the comments).

WHY IT WORKS

SHAKs fairness lies in the trade-off between the two constraints.  If one founder considers the equity to be more valuable than what he is letting it go for, he can easily outbid.  Eventually the system reaches a point where both parties disagree least.  At this point, the negotiation is complete and everyone is as happy as they could possibly be with the trade.  We’ve optimized and maximized Total Satisfaction of the set.

Quick and painless.

USE IT!

Give the SHAK method a trial run on your start-up and let me know how it goes!

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2 Responses to Hacking the 50-50 Equity Split Using SHAK

  1. Pingback: Hacking the 50-50 Equity Split Using SHAK | NERDr.com « Blogs About Everything

  2. This is a good method if the founders have an unequal split workload. Example, technical founder and non technical founder. For a situation with two tech founders 50-50 is always best.