Good morning! 

Don’t let the week slip by without catching this:

1. Why Smart Founders Rarely Split Equity Evenly. (5 min read)

2. A Corporate Transparency Act update – Nothing new, just a refresher in case you missed it. (1 min read)

One big idea for Thought Experiment Thursday—let’s dive in.

-TCoL

Missed our last feature article? “Get Business Funding in Days, Not Months—But Read This First”

Read it here.

The Situation:

You're on the brink of launching your startup and recognize the need to bring in co-founders to bolster coding and design, alongside a couple of investors willing to contribute, say, $25K each. They're enthusiastic about the venture and ready to invest time and money now. However, like many startups, your internal valuation is more conceptual than concrete, and resources (and time) to hire someone to determine a value are scarce.

Two things stand out:

1. The co-founders' contributions will vary in effort and impact.

2. A swift, straightforward method is needed to document mutual expectations in exchange for their investments.

Complicating matters, some of these potential partners are relatively new acquaintances.

The Solution: A Startup Equity Matrix

What is a Startup Equity Matrix?

Years ago, Professor Frank Demmler, a Teaching Professor of Entrepreneurship at Carnegie Mellon University, introduced the Founders' Pie Calculator, also referred to as the Startup Equity Matrix (SEM).

Demmler observed that equal equity splits often spell trouble for startups. Such arrangements can breed resentment among co-founders who contribute more or outwork their peers. It's far more sensible to lay everything on the table from the outset, agreeing upon and acknowledging each other's commitments and expectations.

Why divide the equity "pie" equally when the knowledge, effort, and future commitments aren't evenly distributed?

Consider this example: Four friends aim to open a bakery, but only one is an expert baker committing to daily operations. Should the other three, who are passive investors, each receive 25% ownership?

How Does It Work?

The SEM operates by assigning "weights" to critical functions essential to the business's success. Below is an excerpt from an actual SEM used by a successful startup:

In this matrix:

• Rank: Prioritizes each foundational element.

• Weight: Assigns importance to each element.

• Contribution: Rates each individual's input on a scale (e.g., 1-10).

• Weighted Score: Multiplies the contribution by the weight to determine impact.

The original founder typically establishes these ranks and weights, but it's beneficial to involve all stakeholders in the process. One successful user of the SEM emphasized that group scoring has been crucial to their business in minimizing future misunderstandings and conflicts.

Another useful aspect of an SEM is how flexible it can be when considering the practical aspects of taking in new investors. In our example above, this startup only allowed 3 points instead of 5 if an investor could not pay the initial investment in a lump sum.

Additionally, note that the startup decided to reserve 5% of total equity for future employee retention plans. So, we encourage you to be equally as thoughtful and customize the SEM for your business.

Considerations & Pro Tips:

Even if you ultimately decide on an equal equity split, employing the SEM ensures that such a decision isn't inherently unfair. It provides a transparent framework to evaluate each member's contributions and commitments.

When using an SEM, consider attaching it to:

• Company resolutions that onboard new investors.

• Employment-offer letters or contracts for investors who are also employees.

• Stock or interest purchase agreements (or operating agreements for LLCs).

This practice ensures clarity regarding current and future expectations among all parties.

As time progresses, the initial SEM serves as a benchmark to assess the wisdom of your decisions and whether all parties are honoring their commitments.

Additionally, explicitly defining who among the early investors is considered a "co-founder" can preempt potential disputes over titles—an additional common source of contention.

Incorporating an SEM fosters transparency, reduces the likelihood of misunderstandings, and promotes harmony among co-founders and early investors.

Old Business:

CRITICAL UPDATE: The Corporate Transparency Act

What is the new update?
On 27 February 2025, the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN) issued new guidance stating that, for now, “[i]t will not issue any fines or penalties or take any other enforcement actions against any companies based on any failure to file or update beneficial ownership information (BOI) reports pursuant to the Corporate Transparency Act (CTA) by the current deadlines” (which is 21 March 2025). Read the full guidance document here.

Then, President Trump posted this:

Note that it says, “for U.S. Citizens.” That means that there is still some life (and applicability) left in the CTA for non-citizens.

What is the CTA?
The CTA is a 2021 federal law requiring all U.S.-formed or registered entities to either confirm they qualify for an exemption or submit a BOI to FinCEN.

I already filed—now what?
You’re set. No further action needed.

Will the new Trump administration scrap the CTA?
Likely for U.S. domestic entities but NOT for foreigners that own businesses in the U.S. Upcoming rule making and current litigation could lead to significant changes. Also, the small business lobby is out in full force putting pressure on the Trump Administration and lawmakers to do away with the CTA or significantly restrict its applicability.

We’ll keep tracking this. If you spot a reliable update before we do, reply or DM @thecoletter on X or LinkedIn.

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