The pitfalls of equity allocation and reallocation.
By Bill Reeb and Dominic Cingoranelli
I want to address the issue of equity – how it is commonly allocated to begin with, and then making adjustments to it over time.
For many firms, the idea in the beginning is that “all the partners are the same, so their ownership should be the same.” When the firm starts out with only a shingle, this is a very fair premise. So, for the sake of this column, let’s start out with a two-partner firm and build from there, talking through the common issues that arise in the area of distributing equity ownership.
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Start with two
The most common approach would be for the two partners to split the ownership 50/50. The reason why this often works so well is because the two people who join together often are brought together because of their complementary skills. For example one might be very technically competent and the other more marketing savvy. Together they make a great team – one, without the other, is less effective.